Getting a mortgage can be a daunting process, especially if you have a less-than-perfect credit score. In the UK, many people worry that bad credit will prevent them from securing a mortgage and becoming homeowners. But the good news is that having bad credit doesn’t mean you’re out of options. There are mortgage products designed specifically for those with lower credit scores, and there are steps you can take to improve your chances of getting approved.
In this guide, we’ll explore mortgage options for people with bad credit, how you can improve your credit score, and what you need to consider before applying.
What is Bad Credit?
Bad credit refers to a poor credit history, usually due to missed payments on loans, credit cards, or other forms of debt. Lenders use your credit score to assess how risky you are as a borrower, and a lower score can suggest that you may struggle to keep up with payments. Common reasons for bad credit include:
Missed or late payments on previous loans or credit cards
County Court Judgments (CCJs) against you for unpaid debts
Bankruptcy or entering into an Individual Voluntary Arrangement (IVA)
High credit utilization, where you are using a large portion of your available credit
A low credit score can make getting approved for a mortgage more challenging, but it’s not impossible. Some lenders specialize in offering mortgages to people with bad credit, though you may face higher interest rates or stricter lending criteria.
Can You Get a Mortgage with Bad Credit?
Yes, you can still get a mortgage with bad credit. However, the terms you’re offered might differ from those with better credit scores. Here are some key considerations:
Higher interest rates: Lenders may charge higher interest rates to compensate for the risk.
Larger deposits: You might be asked to provide a larger deposit (typically 15-25% of the property’s value).
Limited product options: The choice of lenders and mortgage products may be more restricted compared to those with good credit.
Fortunately, some mortgage providers specialize in offering products for people with bad credit. These are known as adverse credit mortgages or subprime mortgages, designed specifically for individuals with less-than-perfect financial histories.
Mortgage Options for People with Bad Credit
Here are some potential mortgage options for those with a poor credit rating:
1. Specialist Lenders
Some lenders specialize in bad credit mortgages, which cater specifically to people who have had financial difficulties in the past. These lenders are more likely to consider your overall financial situation, rather than just your credit score. They may look at factors like your income, savings, and the severity of your credit issues when making a decision.
Specialist lenders often work through mortgage brokers, so consulting a broker can help you find the right lender for your situation.
2. Government Schemes
The UK government offers several schemes that can help first-time buyers and those with low credit scores get onto the property ladder. Some of the most popular options include:
Help to Buy Equity Loan: The government lends you up to 20% (40% in London) of the property’s value, meaning you only need a 5% deposit and a 75% mortgage.
Shared Ownership: This scheme allows you to buy a share of a property (between 25% and 75%) and pay rent on the remaining portion. You can gradually increase your ownership over time.
While these schemes aren’t specifically for those with bad credit, they can be helpful if your deposit is smaller due to financial difficulties.
3. Guarantor Mortgages
A guarantor mortgage is a type of mortgage where a family member or close friend agrees to guarantee your loan. This means they will step in and make payments if you are unable to. Having a guarantor with a strong credit history can make it easier to get approved for a mortgage, even if your own credit is poor.
Guarantor mortgages reduce the risk for lenders, making them more likely to approve applications from people with bad credit.
4. High Deposit Mortgages
While not a specific mortgage product, one way to improve your chances of being approved for a mortgage with bad credit is to provide a larger deposit. The more equity you can offer upfront, the lower the lender’s risk, which may offset concerns about your credit score.
A deposit of 20-25% or more can make you a more attractive borrower, even with bad credit.
Tips to Improve Your Chances of Getting a Mortgage with Bad Credit
If you have bad credit but still want to buy a home, there are steps you can take to improve your chances of securing a mortgage:
1. Check and Improve Your Credit Score
Before applying for a mortgage, check your credit score. Review your report for any errors and dispute them if necessary. Additionally, take steps to improve your score, such as:
Paying bills on time
Reducing existing debt
Limiting applications for new credit
2. Save for a Bigger Deposit
As mentioned earlier, offering a larger deposit can significantly improve your chances of getting a mortgage. Aim to save at least 15-20% of the property’s value.
3. Reduce Outstanding Debt
Lenders will look at your debt-to-income ratio when considering your mortgage application. By paying off some of your existing debts, you’ll reduce this ratio and make yourself a more attractive borrower.
4. Get Mortgage Advice
If you’re unsure where to start, speak to a mortgage broker. Brokers have access to specialist lenders who may offer bad credit mortgages that aren’t available on the high street. They can guide you through the application process and help you find the best deal for your situation.
Conclusion
While having bad credit can make getting a mortgage more difficult, it’s not impossible. With the right approach and a little extra preparation, you can still secure a mortgage and achieve your dream of homeownership. Whether it’s through specialist lenders, guarantor mortgages, or government schemes, there are options available for people with poor credit.
Comments