Getting a mortgage can be challenging, especially dealing with all the financial complications and varying lenders requirements.
But if you have a bad credit score, it could compound problems further. People with bad credit scores can be a red flag for lenders, as they consider such individuals higher-risk borrowers.
Hence, getting approval for the loan may mean having to accept higher interest rates, additional lender requirements and jumping through more hoops.
In such instances, people might be tempted to apply for bad credit mortgages, and that’s what this article is about.
We will discuss how you can improve bad credit, how to qualify for bad credit mortgages, and the risks involved with the process.
Table of Contents
What Qualifies As A Bad Credit Score?
A credit reference service looks at a person’s debt history and how well they are paying their debts and credit commitments. This credit score helps estimate a person’s financial situation to determine whether they can be trusted to repay a mortgage loan.
But there’s no fixed rule as to what constitutes bad credit because every lender has a different set of rules. For instance, even with a credit score of 800, some lenders might consider you high risk, while others might regard you as the ideal candidate.
Types Of Bad Credit
For a better understanding, we have highlighted the types of bad credit in this section.
1. County Court Judgement (CCJ)
A County Court Judgement is where you may have failed to repay a credit commitment and the provider registers this with the courts in order to retrieve the money owed.
It’s possible that a CCJ can negatively impact your credit score and the ability to get credit for a minimum of 6 years.
2. Low Score
One of the main reasons for bad credit is a low credit score due to either you not having much of a credit history or you have previously missed payments. It’s normal for the credit score to vary from one company to another.
Most lenders have an internal scoring system that reflects their attitude to risk and the stren
3. Defaults
If you have defaulted on an account, it will show up on your credit report and may reduce your chances of getting a loan. This is because lenders become aware that you struggled to make repayments in the past.
Defaults, once registered on your file, will stay on there for a period of 6 years.
4. Bankruptcy
When you have declared bankruptcy, it can take years for your credit score to improve and some lenders may not offer mortgages to applicants who have previously declared bankruptcy.
5. Missed Payments
Another factor that can affects your credit score is missed payments on credit accounts. Even if you make a late payment, some lenders may still view this as a missed payment which could affect your chances of obtaining a mortgage.
6. Payday Loans
You might be tempted to take out a payday loan but be aware that lenders can look unfavourably in most cases if you have taken out short term pay day loans recently.
Some may require no payday loans taken out within the last 12 months.
What Is The Minimum Credit Score For A Normal Mortgage?
Each lender is different and as mentioned before, a lot of lenders have internal credit scoring systems which may be different to the credit reference agencies score.
Lenders will refer to either Experian, Equifax or Transunion to access the data on your credit report but they will make a decision based on their own internal system in most cases.
What Happens To People With Bad Credit?
The main drawback of bad credit is that it can be tough to get approval for mortgages since lenders will regard you as a higher-risk borrower. They expect the chances of defaulting to be higher because you have missed or made late payments previously.
To offset their risk, lenders may reject your application or charge higher interest rates than those with a strong credit score.
Can You Get A Mortgage With Bad Credit?
While most people assume that getting a mortgage with bad credit is near impossible, that’s not the case. You may still be able to get a mortgage despite the options being more limited.
In some cases, depending on the level of your adverse credit, some high street lenders may still be able to consider your application as long as you pass their internal credit scoring system and you meet their criteria.
When this isn’t possible and the high street lenders refuse your application, there are specialist lenders who can consider a wide variety of mortgage applications for people in different circumstances.
This may be for bad credit, self employed applicants or even unusual property types.
Such lenders can usually look at your application as a whole and on a case by case basis, rather than a ‘computer says no’ approach.
What Are The Risks Of Bad Credit Mortgages Loans?
Here are 3 risks associated with bad credit mortgages that you must consider.
1. Higher Interest Rates
The biggest risk of bad credit mortgages is they can attract higher interest rates than standard mortgages. Lenders usually regard people with bad credit as high risk and set higher interest rates to protect themselves if they default.
2. Higher Payments
And when there are higher interest rates in place, the amount you have to pay over the lifetime of the loan could be higher.
Keep this in mind to form an effective budget for making monthly mortgage repayments.
3. Risks Of Defaulting
No matter how certain you are about repaying the loan, the risk of default always looms large. In extreme cases, people who have defaulted find their homes repossessed in order for the lender to recoup their
How To Get Approval For Bad Credit Mortgages?
Follow these steps to increase your chances of getting approved for a mortgage for bad credit.
1. Review Your Credit History And Score
Your first step would be to access the credit report from the 3 major credit bureaus in the UK, namely Experian, Transunion and Equifax.
This can also highlight errors on your credit file which you can try to amend.
2. Speak to a Specialist Mortgage Advisor
A specialist mortgage advisor will be able to review your credit file and assess your eligibility with a variety of lenders to match your circumstances.
3. Deposit Levels
Depending on the severity of your bad credit and the lenders available to you, you may need to put a larger deposit down in order to be eligible for some specialist lenders. Having a good level of deposit available may be the difference between you getting a mortgage or not.
FAQ
1. Do mortgages affect credit scores?
You will notice a slight and temporary blip in the credit score after taking out the mortgage, which goes away once you prove your ability to repay the loan.
The important thing is consistently paying the repayments on time and keeping the debt-to-income ratio low to improve the score.
2. How long does it take to get a mortgage approved?
This all depends on the lender and how quickly they can process the mortgage but on average mortgage applications can take between 2-6 weeks before your application is approved.
Mortgage offers are usually valid for around 6 months which should give you plenty of time to complete on your property purchase.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.
I am CeMAP (Certificate in Mortgage Advice and Practice) qualified mortgage adviser with a strong background in Finance. I specialise in providing expert advice on a range of mortgage products, including first-time buyers, remortgages, buy-to-let mortgages and bad credit mortgages.
I am CeMAP & CERER qualified mortgage adviser and have helped a number of clients realise their dreams when they thought it would not be possible. I’m skilled at getting mortgages sorted for people with a history of missed payments, CCJs, defaults, debt management programmes, IVAs and bankruptcies.
