How to get a mortgage with a bad credit history

If you have had past credit problems it can be difficult to find a lender willing to offer you a mortgage. Stephen Little looks at the options available to borrowers with a poor credit history looking to buy a property

Since the implementation of the Mortgage Market Review in 2014 lenders are required to be even more vigilant when checking a borrower’s credit history.

As a result your credit score is becoming increasingly important when taking out a mortgage. Justin Basini, chief executive of credit checking firm ClearScore, said the most common mistake people make when taking out a mortgage is failing to understand the impact of a credit score on the application process.

“A mortgage is probably one of the biggest financial transactions you’ll ever make, so it’s crucial to get yourself into a strong position before you start the application process. Having a low credit score can impact your mortgage application in a big way.

“It can lead to not getting the deal you want, and in worst case scenario a rejection.

Often lenders won’t give mortgages to those with poor credit histories. Those lenders that will, typically have higher APRs (annual percentage rate) as you’re a riskier borrower.”

Your credit score is a number that gives lenders an idea about how you manage your money and how much of a credit risk you are.

If you have missed payments or are in lots of debt the lower your score is going to be. However, the opposite is also true, so if you pay back money you borrow – regularly each month and don’t have any debt you will score more points.

The higher your credit score is the more likely you are to be accepted for a mortgage and get a better interest rate as a lender will see you as less of a risk.

It is determined by your credit report, which provides details about your credit activity and current credit situation, including loans, credit cards, mortgages, mobile phone contracts, utilities and overdrafts.

According to Experian, 61% of homeowners have never checked their credit report, highlighting the need for borrowers to be more informed before applying for a mortgage.

Rachel Springall, finance expert at Moneyfacts, said: “The lack of a credit history, difficulty to prove that you’re a good borrower or missing simple credit card payments will affect your credit score and may dampen your chances of being approved for a mortgage. Getting a mortgage is likely to be the biggest financial commitment of your lifetime so it’s important to be sure you are in the best chances of being accepted.

“Lenders assess the credit history as it gives them a base on how much risk a borrower can pose. If a borrower shows a bad credit history, a lender may see this as a more risky borrower and decide not to grant a loan.

“Affordability is a huge part of the process, especially since the Mortgage Market Review came into force. Lenders will now scrutinise borrowers and check to see whether they can afford repayments should interest rates rise.  Lenders need to feel confident that there is minimal risk of borrowers defaulting on their mortgage.”

How to check your credit report

The three main credit reference agencies used by lenders are Equifax, Experian and Callcredit.

However, as each credit agency has different information about you, it is advisable to check all three from time to time.

Experian gives a score out of 999, Equifax’s is out of 700, while Callcredit’s is out of 710.

All three agencies are required to provide you with a report when requested, which you can get online for a fee of £2. You can also check your credit score for free using Moneysavingexpert’s Credit Club (Experian), ClearScore (Equifax) and Noddle (CallCredit).

Fortunately, you can check your credit report and score as often as you like and it won’t affect your credit rating.

However, lenders will search your credit report when you apply for credit, which can leave a record. If you get a quote a footprint can also be left on your file.

It is important to check that your credit score is accurate, as mistakes can sometimes be made that can affect your application.

There are a range of errors that can occur, including incorrect addresses, wrong names of lenders providing credit and incorrect credit products or services.

If you spot a problem, make sure you get it fixed as soon as you can.

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What affects your credit score?

Skipping payments on your credit card, applying too often for credit or even being late on your mobile phone bill can all negatively affect your credit score.

Applying for credit

Every time you apply for credit a mark will be left on your file, affecting your credit rating.

If you have made one or two applications this is unlikely to harm your score. However, if you make lots of applications this may worry lenders as they will look at you as someone who is failing to get the credit they need.

Agreement in principle

A lot of people get an Agreement in Principle (also known as an Approval in Principle or Decision in Principle) before they apply for a mortgage. This is a certificate or statement giving an indication of how much a lender might give and you will have to supply details of your income and outgoings.

A lender can run a hard check or a soft check on your file if you get a Decision in Principle. A soft check will just show up as an enquiry, but if the lender runs a hard check this can leave a footprint on your credit score. So it is best to check with your lender what type of search it does.

Banks and building societies value stability and one way they can determine this is looking how long you lived at one address by checking the electoral roll.

So your credit score will be higher the longer you have lived at an address than if you have moved around a lot.

Repayments

Missing a payment may not affect your overall score but it could go against you when applying for a mortgage.

If you have missed a payment or you are late, even on a mobile phone contract, this will stay on your credit report for at least three years.

In the eyes of the lender this will look as if you are unable to make regular payments and you could find yourself being rejected.

If you miss several payments your lender could put your account into default, which can have an even worse effect on your credit score.

Joint account

Your credit score can also be affected if you have had a joint account with someone as it creates a financial link between the two of you.

So if your partner or ex-partner has a bad credit record, you could have problems as well.

County Court Judgements and bankruptcy

If you have got a County Court Judgement (CCJ) ordering you to pay back your debt or you have been made bankrupt your chances of getting credit could be seriously affected.

They can both take up to six years to be removed from your file unless you settle within 28 days.

Before applying for a mortgage it is advisable to check that your County Court Judgement or debts that are included in the bankruptcy are showing as satisfied or partially satisfied, i.e. they have been paid off or partly paid off.

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Improving your credit score

Competition for homes is fiercer than it has ever been and lenders are checking all aspects of a borrower’s finances with a fine-tooth comb, so it is becoming increasingly important to make sure your credit history is in good shape. But what can you do to improve your score?

James Jones, head of consumer affairs at Experian, said that too many hard searches by lenders – when a lender checks your score when making a lending decision – can affect your credit rating and lower your score.

“When someone is applying for lots of different products in a short space of time then that is often a sign of financial stress.

“Applying for lots of credit will probably hit your score, so we would advise people to stop applying and wait for it to recover.”

Stability plays a huge role in determining your credit score, said Jones.

“Lenders do like stability across the board. A customer that has been in the same address for 10 years, or had the same employer or the same bank will score more highly.

“If you have had a credit card for 10 years then you pick up extra points for having that long-standing relationship with a lender.”

Paul Wiseall, brand and campaigns manager at Callcredit Information Group, said getting on the electoral roll was crucial for building your credit score.

“Being on the electoral roll will show stability to a lender and give you a stronger score. It can take the local authority around three or four months to pass the information on, but it can make a big difference.”

Missing payments, even on a mobile phone contract, can have a huge impact and you are typically looking at around 100 points coming off your score.

Lisa Hardstaff, consumer credit expert at Equifax, said that one of the key things to do to guarantee a good score was to make sure payments are on time.

“People often set up payments and then forget to arrange a direct debit or a standing order and that is classified as a missed payment. They may not be particularly bad, but a pattern of missing payments could be interpreted by lenders that you have overstretched yourself and you are unable manage your finances.

“It’s about how you manage your accounts and how much of the available debt you are using. That’s quite important when it comes to mortgages because the lender has an obligation to make you sure you can afford the mortgage even if interest rates go up.”

Wiseall also warned that being financially linked to someone from a previous relationship through a joint account or mortgage could come back to haunt you.

“While that won’t affect your day-today life if you then go for a mortgage a lender may be obliged to check the other person’s credit file because the two are linked.

“If they find the other person’s credit history is not so shiny, they may take that into account as well.”

If you don’t have a credit history you could also struggle to be approved for credit as lenders do not have any current information on your ability to borrow. If this is the case, taking out a credit card will help you build up your score, said Hardstaff.

“There are other things people can do depending on whether they have a thin file, which means that they haven’t had a lot of credit. In that case they could take out a credit card and use it to make small payments on the things that you normally buy such as your food bill.

“This way you can show you have paid off your debts in full and on time. That will help to give you a good credit rating.

“Even if you have a poor report it is not the end of the world. What lenders are looking for is a pattern of good behaviour. If you make changes over a period of time it will be reflected in your score.”

Getting a mortgage

If you have got a poor credit history and are worried that you won’t be able to get a mortgage, all is not lost.

While having a poor credit score can make getting a mortgage more difficult, there are some lenders that can help.

Determining the impact previous credit problems are likely to have in securing a mortgage depends largely on the individual’s circumstances. Much will come down to the severity of the problems, why they were incurred and crucially when.

“A borrower that has experienced a relatively minor blip that occurred several years ago and was remedied quickly is likely to have a better chance of being considered for a mortgage by a mainstream lender than someone still grappling with the fallout of more recent, severe difficulties,” said David Hollingworth, mortgage expert at L&C Mortgages.

If you have been turned down by a high street bank or building society you might want to try apply through a specialist lender.

Hollingworth said that an increasing number of lenders will consider those that have experienced some credit difficulties.

He explained: “Specialist lenders will offer a range of mortgage options that increase in rate according to the severity of the credit problems. Although that means rates will be higher than the mainstream it could open up some mortgage options.

“That could be really helpful for those that are putting their problems behind them and are now building a good track record in managing their credit.

“Some smaller lenders don’t look at credit scores and can therefore take a more individual approach where there is good reason, even though they can see historical issues on the credit file.”

Specialist lenders include names like Precise Mortgages, Pepper Homeloans, Kensington, Vida Homeloans, Bluestone, Foundation Homeloans and Magellan. Cambridge Building Society offers a range of mortgages for those who don’t have a perfect credit history. Victoria Stubbs, chief risk officer, at Cambridge Building Society, said: “We look at people as individuals and try to understand why things have happened.

Everybody has got a different history and we take that into account. We don’t have a ‘computer says no’ model, so we will look at people with missed payments.”

Cambridge has mortgages specifically designed for borrowers that have missed loan payments – even on a mortgage – or have County Court Judgements (CCJs) that total under £5,000.

“The credit rating agencies tell us things like the number of missed payments and the level of outstanding debt.

Then we will make our own judgement based on that, so we don’t use a number they’ve created,” said Stubbs.

Hollingworth said it is worth checking whether there might be a mainstream lender that is happy to consider the situation as rates are likely to be lower than with a more specialist lender.

“Understanding what the lender is looking at on the credit file is an easy thing to do and at little or no cost. That will help inform an adviser as to which lenders might be willing to consider the applicant. If there’s a good enough track record since the original issue then it may mean that the credit score will be strong enough for a high street lender,” he said.

Springall said: “It may be easier for some individuals to get a guarantor mortgage. This is useful for younger borrowers or students who have little to no debt and may be turned down due to their lack of credit history.

“Sometimes a smaller mutual lender can assess your affordability much more closely, versus a large high street bank.”

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Case study: Taking out a mortgage

Samantha Hodge lives with her partner Sam Wright in North Prospect, Plymouth. They are both educational support workers and decided to buy a home together in October 2016 as they didn’t want to continue renting. They thought that the amount they were paying each month would be better invested in their own property.

However, as they both had debts outstanding on credit cards as well as personal loans when they initially investigated the possibility of getting a mortgage, they were told that it probably wouldn’t be possible due to their credit rating.

Samantha explains: “We felt that we were caught between a rock and a hard place. We thought that we would have to save up a substantial deposit to be able to buy somewhere, but then if we were saving for a deposit we wouldn’t be able to clear off our debts. And if we’d not paid down our debts, then this would impact our credit score so we wouldn’t be able to apply for a mortgage. We were just going around in circles and all the time, paying hundreds of pounds a month in rent.”

The couple were recommended to Mortgage Advice Bureau to see if there were any alternatives to their situation.

After reviewing their finances their adviser suggested a specific Help To Buy mortgage.

Because the mortgage didn’t require them to save for a big deposit, Samantha and Sam were able to use some of the money they had saved to clear off some of their debts, meaning that their credit score improved enough for them to be considered for a mortgage.

Samantha says: “We felt so relieved that we were able to pay off our debts and buy a house. Before then, we thought that we couldn’t do both and that we’d spend years renting, which would have been such a waste of money.

“Before we spoke to Mortgage Advice Bureau we’d been told that without paying off the debt it would have been impossible to get a mortgage. But we couldn’t see how we could do that and save the money we needed for a deposit. No one had explained that we could reorganise our finances so that we could pay down our debts, yet apply for a mortgage which didn’t need such a large deposit.

“We’re in a much better financial position now because we’ve cleared our credit cards and have bought a house. Hopefully our property will increase in value over the years, so although we now have a mortgage it’s good debt rather than the bad debt we had sat on credit cards.”

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Myth-busting

There are lots of myths out there about credit reports and scores which sound perfectly reasonable, but could in fact be preventing you from improving your credit history.

One of the most common myths about credit scores is that your address might be blacklisted because the previous person that lived there had a bad credit score, said Hardstaff.

“Your credit rating is specific to you. There is no way that somebody living in your house or has previously lived there and has a bad credit history will impact you,” she said.

Your partner is only likely to affect your score if you have financially associated with them because you have taken out a joint mortgage or loan with them for example. So just because you live with someone does not mean you will have a financial connection.

Shopping around should not affect your score, as long as you are just getting quotations and not making applications for actual credit.

You have to give permission for a credit check, but make sure lenders know you are just after a quotation.

Just because you have never borrowed does not mean you will have a good score.

Credit scores allow lenders to judge whether you are suitable for credit. For them to do this they need to be able to see your previous borrowing and repayment history. If you have not borrowed they won’t be able to judge your habits.

Wiseall said: “If you have never used credit then you might assume you’ve got a good rating, but you could find yourself with a worse score than you expect. It actually it comes back to the idea of giving lenders confidence that you can manage these things.”