Britain is supposed to be a great home-owning democracy. More than 63 per cent of us either own our home outright or have a mortgage. Even though the numbers of homeowners have slipped since the financial crisis, the vast majority of UK citizens still either own or aspire to own their own home according to recent surveys.
But millions of those people have bad credit ratings either because of poor financial management in the past or because they simply haven’t yet had the time to build up a sufficient financial history for lenders to consider them for mortgages. This can seem particularly unfair to young people who have always managed their money responsibly but have never taken out a credit card or loan.
Securing a mortgage if you are in either of these categories can prove difficult and extremely frustrating. In years gone by, borrowers with bad credit or simply those who were self-employed and therefore locked out of the mainstream mortgage market could simply apply for what was known as self-certification or self-cert mortgages. With these types of mortgage, borrowers didn’t have to prove their income with bank statements or pay-slips provided by their employer.
Instead, they simply told the financial organisation what they made or what their salary was and this was accepted. Lending was made according to “affordability criteria” which saw some mortgage companies loaning out five, six, seven, even eight times an applicant’s annual salary.
Self-cert mortgages were banned after the financial crisis making it more difficult for self-employed people and those with bad credit ratings to get mortgages.
Difficult, but not impossible
It is not impossible to secure a mortgage from a high street bank or one of the main lenders when you have a bad credit record, but it can be very difficult. If you are in the early stages of looking for a new home, then you might like to take a few months to improve your credit rating, particularly if your record is impaired rather than very poor.
Most lenders will be willing to judge whether you have recovered from the financial difficulties, which caused the credit impairment in the first place and then kept on top of all your financial commitments.
Lenders will want more information than with somebody who does not have credit problems. On top of your pay slips, they may also want to see your bank statements and also three years of accounts if you are self-employed. You will also have to make a disclosure about other debts and outgoings and be prepared to fill in a full financial assessment questionnaire.
If you are considering applying for a mortgage and you are unsure about your credit rating, you should think about trying to reduce the amount you have outstanding on any credit cards or settle loans early if you are in a position to. Doing this will improve your rating in a matter of months but because mortgage companies scrutinise the credit records of applicants more closely, this may improve your chances more quickly.
Prepare to put down a larger deposit
While applicants with perfect credit ratings should look for mortgages which require smaller deposits – typically 10 per cent but sometimes 5 per cent – those with impaired credit should prepare themselves for having to find more to put down.
Typically, this could be 25 per cent but can go as high as 40 per cent for applicants with very poor credit records who go through a lender, which caters for the sub prime market. The more that you are able to put down as a deposit, then the lower the interest rate that you will have to pay will be.
Consider a guarantor
Those with a very bad credit rating or no credit rating at all might want to consider getting onto the property ladder with the help of somebody else. A relative or friend can act as a guarantor who will either be the first name on the mortgage agreement or agree to meet the repayments should the applicant fall behind.
This option should not be considered lightly. Not only will a guarantor find themselves responsible for what could be substantial repayments should the applicant fall into arrears, their credit rating could be affected if they are late and they could even lose their own home if both they and the applicant let payments lapse.
Mortgage lending is different to other, unsecured lending. Because the loan is secured upon the property that the applicant is buying, the lender will be able to recover at least most of the loan by repossessing the house and selling it should the unthinkable happen.
For this reason, there are a range of specialist lenders who operate with less strict criteria than the high street banks.
Although not as widely available as before the financial crisis, bad credit mortgages are still offered to people with impaired records. Several new lenders have recently appeared on the market and some of the extremely high interest rates that were being levied have started to reduce. There is no one-size-fits-all lender for people with bad credit ratings so you should be prepared for some setbacks and also to shop around. Every lender is different and all applications are considered on an individual basis.
Talk to a broker
Bad credit mortgages can seem like a bit of a minefield – particularly when there are so many options and people’s circumstances can differ considerably. A mortgage broker specialising in this area will be able to help you.
Article provided by Solution Loans, a technology-focused finance broker with a wide range of finance products – specialising in identifying the most suitable types of credit for customers.