Mortgage lending has traditionally been something of a no-go area for poor credit applicants. But with more UK residents struggling with imperfect credit than ever before, flexibility and fair consideration are creeping into the equation. At least, as far as some of the UK’s more specialist lenders are concerned.
Can I get a mortgage with bad credit?
This is the million-dollar question and concern shared by thousands of would-be borrowers across the UK. Exact figures are hard to come by, but evidence suggests that up to one in three Brits fail to gain access to the best deals on the market due to their credit scores. Of which, a sizeable proportion may also find it difficult to qualify for a mortgage.
Contrary to popular belief, however, it is still possible to get a mortgage with bad credit. Most lenders may be put off by an imperfect credit score, but this doesn’t mean the doors are closed completely.
But before penning a mortgage application, it’s important to get to grips with exactly what ‘bad credit’ really means.
What credit score do I need to get a mortgage?
All banks and lenders independently establish their own lending criteria. However, the vast majority of mortgage lenders use three primary credit agencies; Experian, Equifax and Callcredit. Each has its own unique scoring system and classification as to what constitutes ‘good’ or ‘bad’ credit.
In the case of Experian, the highest credit score you can have is 999. Subsequently, anything over 700 is considered good – 800+ putting you in the very top bracket. With Equifax, the maximum score you can have is 700, or so anything above 475 is considered good. Callcredit uses a simple one to five scoring system – one being the lowest, five being the highest and three or over being good.
If your credit score is considered ‘good’ by these three credit agencies, you should encounter no difficulties qualifying for a mortgage.
What if my credit score is way below these requirements?
A poor credit score needn’t necessarily count you out of the running. Nevertheless, there are certain important realities you will need to face up to as a poor credit applicant, such as the following:
- You may find your options limited, as comparatively few providers currently offer poor credit mortgages.
- Home loans are designed specifically for poor credit applicants and tend to be more expensive than conventional mortgages.
- It may be necessary to provide a higher deposit (at least 15%) and more extensive proof of your income.
- The time it takes for your loan to be approved could also be somewhat longer than with a traditional mortgage application.
- Most major High Street lenders will not consider mortgage applications from poor credit customers.
Much as the above may paint a bleak and gloomy picture, it’s not all bad news. Beyond the High Street lies a growing network of specialist ‘subprime’ lenders, catering to the needs of customers with imperfect credit histories.
What’s more, it’s important to remember that a conventional home loan isn’t the only option on the table for buying a property with a poor credit score.
How to get a mortgage with bad credit
The subprime lending market in the United Kingdom is officially back in business. Spurred largely by growing acknowledgement of how difficult it can be to maintain a flawless credit score. The more restrictive the UK’s High Street lenders become, the bigger the business opportunities for the country’s smaller independent lenders.
For the poor credit customer, this opens the door to an increasingly competitive market for ‘subprime’ mortgages. It’s simply a case of knowing where to look for them, which typically means setting your sights beyond the High Street.
Consult with an experienced subprime broker
As would be the case when applying for a traditional mortgage, it’s important to compare as many deals as possible. However, you’ll need to focus your attention on specialist mortgage brokers with relevant experience in the subprime sector. Some brokers exclusively compare deals from major High Street names – all of which may be inaccessible.
Use customer reviews and recommendations to track down a reliable and reputable broker, who can talk you through the options available and compare the market on your behalf. It’s also worth establishing the extent to which the broker’s services and applications penned on your behalf will be recorded on your credit file. At this stage, the last thing you want is to inflict further damage on your credit score.
Consider offering a bigger deposit
Subprime mortgages almost always attach higher rates of interest, elevated administration fees and bigger overall borrowing costs. However, it’s often possible to bring these additional costs under control by offering to pay a bigger deposit. In fact, you may find it easier to qualify for a mortgage in the first place by increasing the size of the deposit.
Subprime lenders consider applications by way of the overall merit. If they’re willing to look past an imperfect credit score, they’ll assess things like current financial status, proof of income, long-term financial outlook and so on. Not to mention, the extent to which the ‘risk’ of lending you the money can be augmented with a sizeable deposit.
This is something to bring up with your broker or financial adviser, who can subsequently point you in the direction of the most suitable and accommodating lenders. The bigger the deposit, the less you can expect to pay for the loan.
Minimise existing debts before applying
One of the first questions you’ll be asked when applying for a subprime mortgage is how many outstanding debts you have at the time. This will include all credit cards, overdrafts, personal loans, hire purchase agreements and so on.
It’s important to remember that irrespective of how punctual and responsible you’ve been with your debts, they still constitute debts. The more debts you have, the more likely you are to be seen as a risky applicant by the lender.
If possible, therefore, you should attempt to settle as many smaller and negligible debts as possible, before going ahead with your application. Pay off credit card balances with your savings, consider early loan repayment where possible and so on. If you can approach the lender with a relatively clean slate, you’re far more likely to qualify.
Assess the alternative options
Depending on your circumstances, a traditional mortgage loan may be out of the question. It’s also possible that a traditional mortgage isn’t the most convenient or cost-effective option for your requirements. If you have existing assets or equity that could be used as collateral for a secured loan, it may be an option worth considering.
Again, the market for affordable and accessible secured loans in the UK doesn’t begin and end with the High Street. If anything, the most dynamic secured loans for most everyday purposes can be found elsewhere.
If you need to borrow a substantial amount of money for no more than a few months, a bridging loan could be exponentially more cost-effective than a mortgage. If your combined assets are worth significantly more than the property you intend to purchase, a bespoke secured loan from a specialist lender could be the answer.
Poor credit is less of an obstacle for those who already have assets or equity of high value. In which case, your credit score needn’t stand in the way of your mortgage application. If anything, it’s perfectly possible to get an even better deal by using your assets as collateral, than if you were to apply for a more conventional mortgage.
Improve your credit score
Of course, the most obvious and effective way to improve your chances of qualifying for a mortgage is to improve your credit score. The problem being that doing so takes time, effort and commitment. In the meantime, you’ll continue to find yourself excluded from the vast majority of mainstream financial products and services on the High Street.
Irrespective of the direction you take, it will always be in your best interests to work on your credit score. Sooner or later, you’re almost guaranteed to find yourself in a similar position once again.
The most effective ways of improving your credit score can be as follows:
- Always make all payments in full and on time
- Never go beyond your overdraft or credit limits
- Don’t apply for any debts you don’t genuinely need
- Avoid applications that may be rejected
- Consider consolidation if you are struggling with debt
It can take years to drive a credit in the right direction, but it’s more than worth the effort. When your credit score is back in the black, it’s far easier to preserve it than it is to repair subsequent damage at a later date.
Briefly summarised, the answer is yes – it is perfectly possible to qualify for a mortgage with bad credit. At the same time, you can’t necessarily expect an easy ride. Nor can you expect the same market-leading deals and rock-bottom rates as an applicant with a glowing credit history.
The key to success lies in understanding your options, accessing the right advice and targeting appropriate lenders. Or in the case of applicants with qualifying assets or equity, considering the alternative options available.