Improve your credit score, choose a realistic property
Can I get a mortgage with bad credit?
The short answer is yes, it is still technically possible to get a mortgage with bad credit. The truth, however, is it can be harder to get a mortgage with bad credit since lenders look at the credit score of anyone applying for a mortgage. Lenders will look at your credit history essentially to see if you would be able to make repayments. It may be more difficult to receive a mortgage if you a bad or low credit rating. If you’ve had a loan, for instance, that you were unable to pay back each month, lenders might see this as evidence you will not be able to afford a mortgage.
The silver lining is that this is not always the case with people who have bad credit. Your ability to take out a mortgage depends on your credit rating, since there is a fine distinction between ‘bad’ and ‘fair’ credit scores. There are lenders who offer mortgages tailored for people with bad credit, though it should be noted these mortgages can include higher fees and interest rates.
The best way to get a mortgage with bad credit might be to reapply after building up your credit score. Whether you are moving homes, looking to re-mortgage, or are a first-time buyer, that route could up your chances of getting a mortgage.
What is ‘bad credit’?
‘Bad credit’ is when you have a low credit score, usually because you have missed repayments on credit cards or other loans, or because you have not paid bills on time. You can get a bad credit if you have been recently declared bankrupt; have a high amount of debt; defaulted on payments; missed repayments; or been served a County Court Judgement (CCJ). The three main credit reference agencies (CRAs) in the UK that hold a credit report on you are Equifax, TransUnion, and Experian. While the information and scoring method of each agency differs, they all align in giving a bad or good credit rating. You don’t have a credit history if you’ve never taken out a loan or credit, making it difficult for CRAs to assess you. It can also lead to you receiving a low credit score.
6 ways to get a mortgage with bad credit
Purchasing a property with bad credit can be difficult to navigate. Since fewer lenders will let you borrow money with bad credit, it means there will be a smaller range of mortgages to choose from; you will typically require a high deposit, upwards of 15%; and mortgages you will be able to get are more likely to be more expensive. There are, however, mortgages that are designed for bad credit.
Here are six tips to receiving a mortgage if you have bad credit:
Show lenders you are a responsible borrower by paying utilities regularly. Do this by making your regular payments, including credit card payments and utility bills, to use a couple common examples, in full and on time.
Try improving your credit score. Reviewing your credit score regularly will help you to improve it. Ensure it is up to date and all the given information is accurate. If you find any errors or inaccuracies, you can reach out to the lender and ask for a correction.
Review your spending and aim to have leftover money each month. Try your best to reduce costs wherever possible, keeping your monthly expenditures consistent each month. The ultimate aim is to have money left over after each month.
Choose a property you can realistically afford. This is the best practice. There are not that many mortgages that go up to 95-100% loan to value, so set your sights on a property you can realistically afford.
You may need a guarantor. Usually, the guarantor you will need is a parent or an older relative. Procuring a guarantor reassures lenders that the monthly payments will be covered if they get beyond your grasp.
Try to save a large deposit. Since you’ll be seen as a risky proposition to lenders, it’s best to prepare as much as possible. Saving a large deposit, if possible, will help you with your lender because you may be required to have at least 20% of the home’s value. One way to achieve this is to delay your plans to purchase by six months to focus on improving your credit score.