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How does bad credit affect your ability to get a mortgage?
A bad credit record is an immediate red flag for banks or lenders.
An application with a bad credit rating is immediately declined or held up during the application and approval process. Many lenders would likely investigate your credit history and assess if you can make your monthly mortgage payments.
Why is getting a mortgage important?
A mortgage allows you access to funds to purchase a house or property.
It would take years to save enough money to buy a home – a mortgage offers you immediate access to funds to purchase your desired house.
A mortgage can also offer you an affordable interest rate and monthly repayments over a longer period compared to other types of loans. This makes it a more preferred option
Mortgages also hold the following benefits:
- Flexibility and choice: There is a variety of mortgages to choose from, with varying interest rates, repayment instalments and instalment periods. This allows you to select the product that best fits your needs and personal preferences.
- Offer long-term stability: A mortgage offers you more stability than renting. Renters renew their contracts yearly and often have to budget for rent increases every 12 months. Mortgages, on the other hand, can offer you fixed rates over longer periods, allowing for better planning and budgeting.
- Access to government support: The UK government has introduced a range of schemes to assist residents in buying and owning their own houses. The Mortgage Guarantee Scheme and the various shared ownership schemes help aspiring homeowners get into the housing market.
Improving Your Credit Score
Use these tips to improve your poor credit rating and increase your chances of getting approved for a mortgage:
- Check your credit regularly: Make it a habit to check your credit report. Stay up to date with your monthly repayments and check that there aren’t any unnecessary charges or penalties added to your accounts.
- Correct any errors on your credit report: If you pick up any errors, speak to your creditors or their credit reference agencies to immediately have these errors corrected on your credit file. Even if they are not your fault, errors can impact your credit report and reduce your chances of qualifying for a mortgage.
- Pay your bills on time and in full: Carefully plan your budget to avoid late or missed payments. Also, ensure that you pay the outstanding amounts. Even if you make a payment but do not pay the outstanding amount, it’s reflected in your credit history, which leads to an adverse credit score.
- Pay more than your due amounts: Pay more than your minimum monthly repayments on your accounts and credit card. This shows mortgage lenders that you manage your debts responsibly and are proactive at reducing your bills. Paying off your debts sooner also helps save costs and improves an adverse credit score.
- Keep your credit usage low: Limit the amount and frequency of your purchases on credit. While it might be convenient to buy on credit when you’re low on cash, there is a possibility that you may not be able to pay the money back. In return, your credit score will be affected.
- Avoid opening new accounts: While it’s easy to buy on these new accounts, your financial situation takes a turn for the worse. This could lead you to struggle to keep up with the repayments.
- Close all unused accounts: Close all the accounts and credit cards you do not use frequently. All these accounts – even if you do not use them – can deter a potential mortgage broker from giving you a loan. Lenders might think that if you use all the available credit, you may become unable to pay your bills.
- Avoid maxing out your credit card: A maxed-out credit card shows lenders that you struggle to control your finances. Keep your credit card balance low and make your monthly payments on time and in full to show that you can manage your credit.
- Avoid using your credit card at ATMs: Using a credit card to withdraw cash at an ATM carries high withdrawal costs and interest rates. Your mortgage lender sees this as evidence of poor financial decision-making.
- Save all your extra cash. Open an individual savings account or a savings account at your local bank to store away any additional money. This helps you save up for a rainy day and can show lenders that you are responsible and plan for the future.
Types Of Mortgages People With Bad Credit Can Apply For
Yes, people with poor credit scores can apply for mortgages. These are the bad credit mortgages on offer in the UK:
1. Bad credit mortgages:
Bad credit mortgages work in the same way as regular home loans. They will, however, cost you more than regular mortgages due to their higher interest rates and fees.
However, with the help of your mortgage broker, you could remortgage your home at a later stage should your credit score improve. This will help you get a better interest rate and more affordable fees. This is granted if you keep paying your monthly repayments.
2. Guarantor mortgages:
Also known as a family-assisted mortgage, this bad credit mortgage allows someone else to assume the responsibility for your monthly repayments if you struggle to keep up with the payments.
The guarantor is a family member or close friend of the loan applicant who legally agrees to repay the monthly repayments if the loan applicant falls behind. The guarantor, however, won’t own the property and isn’t named on the deed.
3. Second-charge mortgages:
With this bad credit mortgage, you use the capital (or equity) of your current home as the loan collateral.
Calculated on the difference between the value of your current home and the amount outstanding on your existing mortgage, this is a good way to access funds without having to remortgage. However, following this route will require you to pay off two mortgages. And, if you fail to make your repayments your house can be repossessed.
4. Bridging loans:
A bridging loan is a short-term loan used by landlords, homeowners and property developers as temporary financing to purchase property.
The loan is in effect until more permanent funding is secured and becomes available, usually from the sale of another asset. Though bridging loans are approved quicker than other mortgages, they have higher interest rates and financing fees.
Applying For A Bad Credit Mortgage
Follow these steps when applying for a mortgage with bad credit:
- Get pre-approved for a mortgage: Before you shop for your new home, apply for a mortgage pre-approval through a specialist mortgage broker. With this document, lenders indicate how much money they’ll give you to buy your new property. With pre-approval, you’ll know what property prices you qualify for and what the terms of your bad credit mortgage are.
- Be open about your financial situation: You must be willing to discuss your financial situation and bad credit history with your mortgage broker. Keep the relevant documents on hand should your bad credit mortgage broker want to see more detailed information about your credit history and spending habits.
- Prepare to pay higher interest rates and mortgage deposits: Mortgages for people with a bad credit score come with higher interest rates and a higher deposit. With this in mind, you will need to be willing to take on this added financial responsibility.
FAQs
What’s the lowest credit score to get a mortgage in the UK?
There’s no set minimum credit score to buy a house in the UK. Rather, ensure that your credit score is good enough that lenders are eager to grant you a home loan.
What’s the debt limit to qualify for a mortgage in the UK?
Lenders agree that the less active debt you have, the better your chances of servicing your mortgage. Therefore, it will be easier for them to offer you a mortgage. If your finances are in a healthy state, you could also enjoy a more competitive interest rate and a lower mortgage deposit.
Sources:
https://www.moneysupermarket.com/mortgages/advantages-and-disadvantages/
https://www.barclays.co.uk/mortgages/guides/boost-your-credit-score/
https://www.moneysupermarket.com/mortgages/guarantor-mortgages/
https://www.experian.co.uk/consumer/loans/guides/bridging-loans.html