UK credit reference agencies provide credit history files and scoring, allowing mortgage lenders to examine an applicant’s financial background and ability to meet payment deadlines on time.
Mortgage providers analyse this information, alongside factors like income and affordability, to decide whether to offer a mortgage and, if so, at what rates.
The three main credit referencing bureaus in Britain are TransUnion, Experian and Equifax. If you have any doubts about your credit score or any adverse history, it’s best to request your reports from all three since they use slightly different scoring systems!
Today mortgage brokers explains why credit scores have such a huge impact on your ability to borrow and what to do if you need to apply for a bad credit mortgage.
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What is a Bad Credit Mortgage?
Some lenders specialise in bad credit mortgages. This option is a great opportunity for individuals to get onto the property ladder with a limited or bad credit history – particularly if they aren’t eligible for another product.
Essentially, a bad credit mortgage is just a regular mortgage product, but the interest rates are likely higher than average, and the minimum deposit is also usually higher.
If you apply for a bad credit mortgage from a specialist lender, you may also find that they impose a lower limit on the amount you can borrow.
Bad credit mortgages can also be called adverse credit and subprime mortgages, and all bad credit lenders have different criteria and factors they look at when offering credit.
When is a Bad Credit Mortgage a Good Option?
A bad credit mortgage is a viable option if you have been turned down from high street lenders for a standard mortgage or know that you fall outside the standard acceptance criteria.
About one-third of residential mortgages brokers analysed between 2019 and 2020 were found to be specially adapted for applicants with past credit issues. Hence, while it’s a niche type of lending, it’s far more common than you might imagine!
We always recommend you seek advice and guidance before applying for a mortgage to ensure you know all options available and the criteria you must meet.
How Much Income Do I Need for a Bad Credit Mortgage?
As with all mortgages, you should only borrow what you can afford to pay back. If your income would not comfortably allow you to make the monthly repayments, then a mortgage would not be a good option – and the lender probably won’t approve the application.
The income you need for a bad credit mortgage is comparable to that of a standard mortgage. However, as we’ve mentioned, the maximum you can borrow as a multiple of your annual earnings will often be lower.
You are less likely to be accepted for a low deposit mortgage if you have bad credit. The average deposit for these mortgages is around 25%, but a bad credit niche provider may have suitable products.
Likewise, you might apply for a government support scheme such as Help to Buy or the Mortgage Guarantee even if you have a challenging credit record and a relatively small deposit.
Things to Consider When Applying For a Bad Credit Mortgage
When applying for a bad credit mortgage, it is important to understand your credit score and how a potential lender will interpret your credit history.
More serious issues such as County Court Judgments (CCJs) or bankruptcy can have a massive impact on your ability to borrow, whereas a few late payments won’t normally be as big a stumbling block.
If you have poor credit due to a lack of borrowing, rather than previously missed payments, you can use tools such as credit-building cards to boost your chances of approval.
Lenders appreciate transparency and can offer you the best support and options if you tell them about your bad credit and concerns. If there is context, such as late payments due to redundancy, which isn’t likely to happen again, you can significantly strengthen your application.
What Can I Do if I Am Rejected For a Bad Credit Mortgage?
Being rejected for a bad credit mortgage can be frustrating and could leave you feeling depleted, especially because applying for a bad credit mortgage seems like the last option for some.
After an unsuccessful mortgage application, your first instinct may be to look elsewhere and apply again. It is important to understand the implications, as multiple unsuccessful applications could harm your credit file.
The best option is to stop, assess and research the best choices available to you with support from an experienced bad credit broker who can ensure your next application has a far greater likelihood of approval.
How Can a Bad Credit Broker Help Me?
A broker can be a fantastic option to help you apply to lenders. Brokers have inside knowledge of what lenders want to see – and which applications they’ll accept.
Revolution Brokers is an independent, whole-of-market broker with years of buy-to-let experience, recommending suitable lenders to match your circumstances.
We can help you compile a strong application and ensure that all options available to you are explored and correctly calculated. Get in touch with our friendly team on 0330 304 3040 or email us at info@revolutionbrokers.co.uk.
