Last updated: 23/07/2020 | Estimated Reading Time: 5 minutes
Taking out a mortgage with bad credit
Many people assume that if they have a poor credit rating, they will not be able to take out a mortgage. This is not the case.
There are plenty of options available to people with a bad credit rating, the trick is to know where to look.
If you have fallen behind on your credit card payments or have been made bankrupt at some point in your life, your credit rating will not be great. There are still plenty of things that you can do that will help you get a mortgage for the property you want to buy.
In This Guide:
- Bad credit mortgages
- Do I have bad credit?
- What are bad credit mortgages?
- How to get a mortgage if you have a bad credit rating
- How can I make my credit score higher?
Bad credit mortgages
One thing that you should be aware of when taking out a mortgage with bad credit, is that interest rates will be considerably higher than they are on standard mortgages. This type of mortgage will also require a larger deposit than other forms of mortgage.
Another thing that is worth noting is the fact that if you have bad credit, you won't be eligible for help from government schemes such as Help to Buy or Shared Ownership. Bad credit mortgages are also not normally accessible to people who have been made bankrupt within the six years prior to taking out the mortgage. However there is still a chance you could be approved for a loan of this type if you now have a clear credit file with no defaults.
If you are going to apply for a bad credit mortgage, you should be earning over £15,000 per year and be prepared to pay a deposit of 15% or more of the property value.
Do I have bad credit?
There are a multitude of factors that can affect what your credit rating is. Some of these may be harder to work out than others but there are a few things that will definitely affect your credit scores directly.
If you have been bankrupted at any point or have had to be put onto a debt management plan, you can expect to have taken a hit on your credit score. This is because you have been deemed to be unreliable when it comes to managing and repaying your debts.
Your credit score may also have been damaged if you have ever struggled with repayments on credit cards or personal loans. The reason that this causes you to have an adverse credit rating is because you fell behind on your loan's specified terms and conditions. This means that you are now deemed to be a higher risk customer as you have a history of not keeping up with your fees.
What are bad credit mortgages?
Bad credit mortgages are designed to help people with an adverse credit rating get a mortgage. You may also have heard of sub-prime mortgages or adverse credit mortgages, these terms all refer to the same thing and can be considered interchangeable.
It should be noted that if you do have a bad credit score, then perhaps taking out a mortgage is not the wisest thing to do. This is because it could end up being too much of a financial burden and if you fall behind or default on this mortgage, your credit score will get even worse.
Although the interest rates charged on bad credit mortgages will be higher than they would have been if you took out a normal mortgage, they can help you in the long run. This is because over time they have the ability to improve your credit rating if you stay on top of payments.
How to get a mortgage if you have a bad credit rating
One rule that applies generally when getting a mortgage, not just to those with bad credit, is that you should check your credit score in advance. This will allow you to know where you stand when it comes to your application.
Another thing that you should do is compare mortgages out there on the market at the moment. By doing this you will have a better idea of what kind of mortgage deals are available and therefore you should know roughly what to expect to pay.
You should also avoid making too many applications for mortgages because do so can often affect your credit rating negatively. For this reason it is a better idea to go into a bank and talk to someone "unofficially" about what your options are and how likely you will be to have a successful application.
Talking to your current account provider can also be a good idea. This will allow you to explain your situation and the reasons that you have a poor credit rating. It may be the case that they do not have any mortgages on offer that are appropriate for your needs but it avoids you having to make an unnecessary application.
How can I make my credit score higher?
If you have a bad credit rating, then there are still some things that you can do in order to improve your score. Improving your credit rating will make it more likely that you will get approved for mortgages and other types of loan in the future. In addition to this it also means that you will probably not have to pay as much interest on future debts.
- Don't fall behind on bills or debt repayments
- Add yourself to the electoral roll
- Don't have any unused credit accounts
- Use a credit builder credit card
- Take out loans with a guarantor
None of these things will make certain that your credit score goes up but it is likely that if stick to the things on this list, you will see an overall improvement in your credit rating.