Whether you are buying your first home, moving house, or looking to remortgage, you’re probably wondering if a bad credit score can affect the possibility of you getting a mortgage. Well, mortgages for people with bad credit are possible – they might just require some additional effort to obtain!
Can I get a mortgage with bad credit?
Getting approval for a mortgage can be difficult if you have a bad credit score, but it is possible. If you have a bad credit history or a low credit rating, this might indicate that you cannot afford to get a mortgage.
It is still possible to get a mortgage if you have a bad credit history, but it is likely that you will have to pay high fees, a larger deposit, and increased interest rates. These mortgages are also known as bad credit mortgages, low credit mortgages, adverse credit mortgages, and subprime mortgages.
What is ‘bad credit’ and what can impact my credit score?
Bad credit is defined as having a low credit score. It is usually due to not paying bills on time or missing repayments.
A bad credit rating can be due to:
- A large amount of debt
- Missed repayments / defaulting on repayments
- Being recently declared bankrupt
- Being served a County Court Judgement (CCJ)
There are three main credit reference agencies in the UK that hold a credit report of your financial activity: Experian, TransUnion, and Equifax. If you have never taken out any type of credit or loan, you will not have a credit history stored with these agencies, which could actually result in a low credit score.
Why is it harder to get a mortgage with bad credit?
Getting a mortgage with poor credit can be difficult because it shows lenders that you may struggle to pay back the mortgage. Applying for a mortgage with a bad credit rating can also delay the process, as you may have to provide evidence of your finances so the lender can assess your ability to make repayments on the mortgage.
Lenders may look beyond your credit score to assess your overall situation – and they may overlook a few small issues, such as minor late payments. However, you should only get a mortgage if you can afford the monthly repayments.
How to get a mortgage with bad credit
Even with a bad credit rating, there are some things you can do to show potential lenders that you are responsible:
- Meet all of your regular payments on time and in full
- Reduce spending where you can, and aim to keep monthly outgoings consistent
- Review your credit report regularly and ensure everything is up to date
- Add a note of correction on your credit report if you have a good explanation for any periods of financial difficulty
- Find a guarantor who is willing to be financially associated to you
- Save for a larger deposit – if you have a bad credit score you may be required to pay 20-30%
Can I remortgage with bad credit?
If you have bad credit but want to remortgage, the most important thing to do is stay on top of your monthly payments – make sure you are paying your bills on time and in full.
Lenders will also want to know the impact of repayments on your outgoings, and what percentage of your income they cover. They may also want to look at the percentage of your current home that you have paid off already.
Should I apply for a mortgage with bad credit?
If you want to apply for a mortgage immediately, without waiting to improve your credit score, it is best to weigh up the pros and cons.
Successfully applying for a mortgage now is quicker and enables you to buy your home at current house prices, avoiding any future price rises. However, it is likely you will need a larger deposit and have to pay higher interest rates as well as potential broker fees.
When bad credit is an issue, both the date and type of issue are assessed. For example, if you have missed bill payments then this will be given more leniency than if you have been recently declared bankrupt. As for the date, the older any negative credit history has occurred, the better.
How can I improve my credit score?
If your application for a mortgage is denied, you can build up your credit score and reapply. Your credit score builds over time, with any negative items remaining on your credit report for up to six years.
If you are unsure if your credit score is suitable, you may apply for a mortgage ‘Agreement in Principle’ or AIP. Some lender’s AIPs will then perform a ‘soft’ credit assessment, which will be visible on your credit report, but only as an enquiry, and will not adversely affect your credit score or your application to other future mortgage lenders. Some AIPs, however, will perform a ‘hard’ credit search. If you have enough ‘hard’ searches, this will start to negatively impact your score, so it’s important to find out before applying to an AIP which type of search they will perform.
To improve your credit score:
- Ensure your details are registered on the electoral roll
- Amend any mistakes on your credit report and keep it up to date
- Ensure you are meeting all your payment deadlines for bills
- Check for fraudulent activity (to avoid your credit score being lowered unfairly)
- If possible, pay off any outstanding debt before applying for a mortgage
- Close any unused accounts or credit cards
An improved credit score does not guarantee a mortgage, but it can make your chances of acceptance more likely.
Whether you’re a first-time buyer or a homeowner looking to remortgage your property, just give us a call or get in touch to talk about your current and future mortgage options. We can’t wait to talk to you!
