The main reason why people find it difficult to get a mortgage is they have bad credit. This means that lenders don’t trust them to be able to pay back the loan due to their history of borrowing. If a person has had difficulties in paying back credit card debts, or have been declared bankrupt, or are currently in some kind of debt repayment programme, then their credit report will show up as bad.
Before the credit crunch there was a thriving market in giving loans to people who fell into this category. It is known as the sub-prime market, and many economists view lenders’ recklessness in giving mortgages to people with bad credit as one of the principal causes of the 2007 banking crisis. As a result, it is now harder than ever for someone with bad credit to get a mortgage, but that does not necessarily mean that the cause is hopeless.
How do I know if I’ve got a bad credit rating?
If you are at all concerned that you may have a bad credit rating, and even if you’re not, it is a good idea to learn about your credit status before applying for a mortgage. You can get a copy of your credit report at any time.
Currently, there are three agencies able to provide this service:
Is it possible to get a mortgage with bad credit?
There are lenders who are willing to give mortgages to people with bad credit, but they will likely charge additional interest for doing so, and they will expect borrowers to provide a larger deposit. Essentially, this means that when it comes to someone with bad credit, the lender will want to insure themselves against that person defaulting on the payments.
In the current economic climate, it is almost unheard of for lenders to give 100% mortgages; instead they offer mortgages with a ‘loan-to-value’ (LTV) rate, which is expressed in a percentage.
If you are buying a property worth £150,000 and borrowing £135,000 with a £15,000 deposit (10%), your LTV rate is 90%. This is considered a very high LTV rate, and those with bad credit will be extremely unlikely to be offered such a mortgage.
Lenders will set their LTV rate for borrowers with bad credit at a much lower rate, more likely to be 60% or less. If they do offer a mortgage with a deposit of less than around 25%, it is likely that the repayments will be subject to a higher lending charge (HLC), which will make the mortgage considerably more expensive over the life of the deal.
As with all complications related to mortgages, if you are worried about your credit rating impeding your ability to get a mortgage, the best thing to do is to get independent financial advice. Your advisor will most likely be able to direct you towards a deal that will suit both your needs and the lender’s requirements.
Can you improve your credit rating?
If you do have a bad credit rating, it is possible to improve it by building a good credit history by repaying all debts, closing your credit card accounts and ending financial relationships (i.e. joint accounts) with others who have bad credit ratings.
From this point you can start to build up a good credit history, but doing so will take some time. If you have been refused a mortgage because of your credit history, don’t apply somewhere else straightaway. The initial refusal will show up on your credit report, and lenders will be even less likely to give you money.