Bad Credit Mortgages and how to improve your credit score.
This is also a podcast episode on The Mortgage Mum podcast is out now on all major podcast directories including Apple and Spotify.
We explain what you need to know about bad credit (otherwise known as adverse credit), how you can improve on your credit score, and tips to help you move forward no matter what financial situation you find yourself in.
There is a really common misconception that mortgage companies will never lend to those with a poor credit history; it is simply not true.
Having a credit record that is not squeaky clean may limit your options but you should certainly not give up hope of ever purchasing your own property if you've had financial difficulties in the past.
There are many mortgage lenders out there who will consider cases from individuals who have had arrears, defaults, County Court Judgements (CCJ), Individual Voluntary Arrangements (IVA), or even people that have been placed on a debt management plan or suffered bankruptcy in the last six years, you can potentially get a mortgage. It depends on your circumstances.
You may need to pay a slightly higher interest rate when you first take out the loan because you are considered to be at higher risk. However, if you keep up your repayments and you take active steps to try and improve your credit rating, there is no reason why you can't find yourself in a much better financial position in the months and years to come.
Our aim at the Mortgage Mum is:
- To educate you
- To keep you looking forward
- To help you stay positive
When you work with us, we get you to take those baby steps, and then in a few years down the line, we can place you with a high street lender and put these problems behind you once and for all.
Read on to find out how you can turn your bad credit into good.
What is bad credit?
Bad credit is missed payments on commitments that you have made with a bank or lender. For example, if you have a loan and then miss a payment, that is classed as bad credit.
Defaults, CCJ’s, IVA’s, bankruptcy, debt management plans, and any kind of missed payment or late payment, classes as bad credit. It means you have breached the agreement that you made with a credit provider.
You can, however, still get a mortgage with bad credit, and to find out your score, you will need to get a report from the credit reference agencies.
What is a credit report?
Your credit report has basic information on it, such as your name, your date of birth, and your address. It also has a timeline of all of your revolving credit commitments and any credit commitments you've had in the past.
When you take out a loan or you agree with a bank or a lender to pay for goods and services at a later date, you are entering into a credit agreement.
That lender will allow you to pay in instalments or with a lump sum, and each lender will have a different condition about those payments. For example, credit cards and loans enable you to borrow money as and when you need it within a set limit.
Once you've paid off some or all of that debt, you can borrow as much as you like within the confines of that limit.
All of the credit accounts you have currently got open and closed in the last few years will be visible on a credit report and they are readily available from the credit agencies.
There are three main credit agencies that we use, and that all mortgage lenders use, to be able to give you a score. These include:
These reports will contain details of any missed payments you have had, any defaults, any repossessions, and any bankruptcies.
They can be viewed by anyone who is considering offering you a credit agreement, and the credit provider that you apply to will carry out a credit search that will leave a footprint on your credit report.
Depending on what type of search they do, it will either be a hard footprint or a soft footprint. Soft footprints are fine, they won't leave a mark on your credit report. They won't give you any negative effect.
A hard credit search can bring down your total score. TIP: Always make sure if you are applying for any type of credit that you are asking, “Is this a soft or hard footprint?” You are well within your rights to ask that question.
Those three main credit agencies will analyse all your credit data to calculate your overall credit rating, and they will give you a score between 300 and 900. It’s this score that is going to help you when it comes to looking for a mortgage.
Where does a mortgage lender come in?
A mortgage lender, depending on who they are, will have their own internal scoring system and that score will work with the credit agencies of their choice.
Sometimes it will be one credit agency that they refer to and sometimes they will have two or even three, and that will determine the score. They all have their own internal calculation of how they see a client and that's where a broker comes in.
Some banks report different information to different credit agencies, so you will find that if you were to get a report with Experian, Equifax, and TransUnion, they might look slightly different.
However, between the three of them, you should get a clear indication. This is usually why lenders pick up on the data from one or two of them to double-check.
Bad credit mortgage lender
The lower the score, the higher the risk to a lender and this is where a bad credit Mortgage Lender comes into their own.
Some lenders that are classed as bad credit Mortgage Lenders will not use their own internal scoring robot. They will look at your case personally with human hands. That is when a credit score does not always impact your mortgage application.
How do I know what my credit score is?
You must know what your credit score is. The key to that is getting a report.
We work with a company called, Check My File which pulls together all of those reports from all three agencies and displays the results in one. We have our own relationship with them, which means you can get a free 30-day trial to get your report (visit the link above). You have to sign up, but you can cancel at any one time.
We highly recommend that you get your credit report. There have been numerous cases where a client has been unaware of bad credit on their report. The most common one is mobile phone providers.
Your old provider can register a default very quickly without you realising. This usually happens when you think you have closed your old contract and gone on to get a new mobile phone contract.
Therefore, it looks like you're missing payments. We would advise you to make sure you get yourself a regular credit report and check that everything looks correct.
Remember to close down accounts
TIP: We recommend you close down any open credit cards and bank accounts you are not using because these are still classed as open and active credit.
How can I improve my credit score?
- Make sure you're on the electoral roll - You need to make sure your credit report confirms where you are living
- Try not to use your credit cards to their maximum limit - Having a credit card is fine if you are using it healthily and you are not maxing out lots of different cards.
Having an ongoing credit card can improve your credit score but the second you go to your limit, it sends the message that you need more money than you have currently got.
TIP: Ideally use your credit cards monthly and clear the balance.
Other factors to consider
- Check old phone utility bills - Make sure your report is accurate because you can have unknown issues on there.
- Associations with other people in your report that you might not be aware of.
You don't want to be tarnished with any of the above without knowing because you will pay a premium for having a bad credit mortgage. It’s about making sure that you can take those small steps to improve your credit score.
Experian Boost can help you to increase your credit score by simply sharing how you manage your money.
Experian lets you share information about your regular spendings, such as payments to savings accounts, council tax payments, and digital entertainment payments. For example, Netflix, Spotify, and Amazon Prime. Payments into investments and savings, such as an ISA and monthly saving accounts are great for this and very boost-worthy too.
If you are making payments like this regularly and you are not spending more than you earn, you could get an instant boost to your credit score. It rewards you for certain day-to-day payments, and it makes that everyday effort of budgeting count.
Anyone can use the tool and it’s completely safe to use. Your information is protected, they don't store your bank login details. If you have an Experian account, you can add this on for free. You do need to have a free Experian account and a current account with a bank or building society that supports open banking access to their customers. It also doesn't hurt your credit score.
If there is information they are scanning on your bank account that they don't like, they will disregard it and you won't get a boost. This is something worth looking into that might help you. You do, however, need to be making sure you are budgeting well to be able to benefit from that.
Can I get a mortgage with a 500 credit score?
This isn’t a simple yes or no answer because some lenders will not work with a score. It depends on what your report looks like and what your bad credit looks like.
For example, “When was it?” “How much was it for?” “What was the value of it?” Lenders also like to know why it happened. Some ignore a default that is less than £300. Some ignore CCJ’s that were registered more than three years ago.
High street lenders will do an internal credit score. That is different and it's going to be difficult to get a high street lender with that type of score. With bad credit lenders, they work differently. They've got different tiers for how bad the credit is and how bad the interest rates are going to be for each tier.
That is why you need a broker because a broker is going to break it down for you and help you understand where you sit in the market, what impact it has and what impact that's going to have on a new interest rate.
If we are looking at a bad credit lender with a particularly high rate we will talk you through what this may look like for you in the future and the steps that we are going to take to get you there.
Can I get a mortgage with late payments on my credit report?
We will always try a high street lender where we can but you will have a much better chance of success with a bad credit mortgage lender. They will be willing to delve deeper into your credit file and understand why they were missed in the first place.
If you can prove that you are now on top of your finances and you are not in arrears with any of your current accounts, then that is going to help you.
Can you get a mortgage with a CCJ?
Some lenders might dismiss your case straight away if there is mention of a CCJ, but that's where a Mortgage Broker comes in. Some lenders will take a positive view of the situation as long as you meet their criteria.
If you are a First Time Buyer for example and you have got bad credit or any type of borrower, you are going to have to have more than a 10% deposit, generally 15% or more.
CCJ’s that were registered in the last 12 months will have a much more negative impact on your chances of securing a mortgage, again it depends on your situation.
Can you get a mortgage after defaulting?
Some lenders specialise in mortgages that have had defaults, and they'd be prepared to review your credit report and assess the level of risk involved.
Satisfied defaults are better than unsatisfied ones because they are proof you failed to repay your debt in the first place but you have since straightened out your finances.
Minor defaults, such as the mobile phone contracts we mentioned earlier, will be taken less seriously. It would be about taking it to the right lender.
Can you get a mortgage if you have had an IVA?
Some lenders will automatically decline it but if you have had an IVA or if you have an IVA now, there is a growing number of lenders that are willing to accept applications from those of you who have them.
Again, they will investigate your credit issues and assess them according to how often they have happened and how bad they are.
If you can wait until you have finished paying the IVA off or it's dropped from your file (this can take six years to disappear), that will improve your credit score and give you access to better deals.
If that isn't possible and you are keen to purchase a new property or remortgage with an IVA, then we recommend seeking advice from a broker.
If you have been made bankrupt in the past six years or you are struggling to get a mortgage and worried that you might not be accepted, there are post-bankruptcy mortgage options available.
If you have been discharged for at least 12 months, there could be lenders willing to look at your options. The interest rates are going to be higher initially because you are considered a higher risk.
If you keep up your repayments, your credit rating will get better. Even with bankruptcy in the background, you can get a mortgage.
Can I get a mortgage if I want a debt management plan?
Yes but you are going to need to prove that you can afford your remortgage payments on top of any outstanding debts.
If you have been on a debt management plan and it has been in place for some time and if you have been successful in meeting all your obligations, there are many lenders who will consider you to be a lower risk.
In this case, you have proven to them that you can satisfy the terms. If you have taken it out in the last six months, however, you might have more limited options.
It’s going to depend on what your debt is related to. If you were on a plan to pay off unsettled credit store cards, then they might look at your situation more favorably than if you are tackling a credit card overdraft.
Note: If you plan to get a mortgage on a debt management plan then your income multiples may also be affected. They might not lend you as much as they would for somebody that has a clean credit file.
Can I be a First Time Buyer with bad credit and can you remortgage with bad credit?
The answer to both of these questions is yes. You can buy your first property, except you are going to need a higher deposit and you are going to need to be aware that your monthly payments are going to be higher.
Remember, you can also apply for some of the government schemes with bad credit such as Help to Buy and Right to Buy.
How we can help you
Our job is to establish what you can and can't afford but you have to know deep down if you are willing to make the sacrifices to keep that repayment up. A missed mortgage payment is worse than a missed unsecured payment.
What we can do:
- We can help navigate
- We can use a packager that you can't access yourselves - A packager can give us exclusive opportunities with the lenders on the high street
- We can present your case in the best possible light and we know how to fight your corner
- We know how to paint a picture that is going to make the lender comfortable
- We are invested in our clients
Don't ever assume you can't get a mortgage with bad credit. If you have any questions or concerns, please do not hesitate to contact us for more information.
The Mortgage Mum is a team of 20 female brokers based all across the UK. They are passionate, driven, enthusiastic women who thrive from helping customers achieve their property dreams. They educate, empower and they give an excellent service from start to finish.
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If you have any questions or you would like to look into this yourself, please do get in touch.
Sarah Tucker, Director, The Mortgage Mum