what are your borrowing options?

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  • Whether you missed a few credit card payments or suffered from more serious debt problems, a bad credit mortgage could be the key to your home buying problems.

    When you apply for a mortgage, lenders will want to be sure that you will be able to repay your loan. In order to help them make an informed decision, they will perform a credit check on you which will show how well you have managed your money in the past.

    Along with details that confirm your identity, your credit report will show how much money you owe and if you have ever missed or made any late payments. This information is then used to give you a credit score.

    If you have a good credit score, lenders will welcome you with open arms, but if you have a low score, you may find it difficult to borrow money. This can apply whether you’re buying a new home or just trying to upgrade to a better mortgage rate.

    Can I get a mortgage if I have bad credit?

    Although it is difficult to get a mortgage or mortgage with bad credit, it is not impossible. The difficulty will depend on how low your credit score is and which lenders you approach.

    Nick Mendes, Technical Director of Mortgages at Jean-Charcol says that while many reputable lenders may reject your application if you have bad credit, specialty lenders may be more pragmatic.

    “Some non-traditional lenders may be able to take a different perspective and seek to understand your situation. This will include how your debts have accumulated and how this has changed in the future.

    These lenders will likely be less dependent on credit scores and will underwrite your application manually to ensure they have a full and proper understanding of your financial situation. “For borrowers who have failed a credit score or don’t fit the profile of traditional lenders, these specialty lenders are often willing to think outside the box,” he adds.

    Image credit: Future PLC/Darren Chung

    What counts as bad credit?

    There are a number of reasons why you might have bad credit. It can range from something relatively minor, like missed credit card or loan repayments a few years ago, to more serious debt issues. You may have incurred a County Court Judgment (CCJ) or entered into an Individual Voluntary Arrangement (IVA) for example.

    As a guide, Mendes says specialty lenders can typically accommodate borrowers with up to four missed mortgage payments, as long as the missed payments are 12 to 24 months old. Small CCJs (usually under £300) can be ignored, even if they have been within the last six months.

    “Specialty lenders may even allow debt management plans to continue, as long as the borrower has kept track of repayments,” he explains.

    As a general rule, the more time that has passed since the problem occurred, the less of a problem it will be. The information in your credit report lasts for six years.

    Jones adds: “While no two lenders are the same in terms of lending criteria and approach to credit scoring, there are common factors that many lenders agree on, including information that will set off instant alarm bells.”

    In addition to missed or defaulted payments, the amount of a borrower’s debt can be a red flag for lenders.

    “Most lenders will take a dim view of customers who are already heavily in debt – for example, maxed out on a series of credit cards – as well as those who applied for credit in the weeks and months before applying for a mortgage. . Borrowing money to raise funds for your mortgage deposit is widely frowned upon.

    Will I pay more for a mortgage with bad credit?

    The catch is that borrowers with bad credit will be seen as a riskier proposition, even by specialty lenders, and that means interest rates on mortgages with bad credit will be higher.

    You may find that you also need to pay a larger deposit. According to John Charcol, borrowers with a good credit history can borrow up to 95% of a property’s value. But if you have bad credit, you may well be limited to 85%.

    What is the minimum credit score for a bad credit mortgage?

    Unfortunately, there is no magic number on your credit score that will determine whether or not you are able to get a mortgage.

    James Jones, head of consumer affairs at the credit referencing agency Experiansays that lenders will each interpret credit scores differently and will be considered with a range of factors.

    “Mortgage lenders will put your financial behavior under the microscope, especially in the months leading up to applying for a mortgage. They will seek to establish two main elements: your financial reliability and, given the significant value of the loan you are requesting, your ability to meet future mortgage payments based on your income and expenses,” he explains. .

    However, while your credit score itself doesn’t tell you whether or not you can get a mortgage, specific details in your credit report can give you an indication of how lenders are reacting.

    brick house exterior with covered porch

    Image credit: Future PLC/ David Giles

    Should I get a mortgage if I have bad credit?

    Determining whether or not you should take out a mortgage with bad credit can be a tough decision.

    If you’re getting a new mortgage and still able to lower your borrowing costs, that probably makes sense. However, if you’re buying a new home, there’s more to consider.

    You need to think carefully about whether your finances are secure enough for you to make such a large financial commitment. You should also consider whether it might be better to focus on saving and improving your credit score. With a better credit history and a larger deposit, you will have a much wider choice of lenders. This means that you will be able to obtain a more competitive mortgage loan.

    For many people, a more expensive mortgage will be a price worth paying to get the home they want, or most likely need.

    If you decide to proceed, it’s worth speaking to a good independent mortgage broker, who can recommend the lenders most likely to accept your application.

    Mendes adds: “If you have credit issues, whether it’s missed payments, defaults, CCJs, IVAs, etc., finding a lender for a mortgage or purchase can seem like a cause. lost.” It is important not to lose hope. Speaking with the right broker will help you navigate between lenders to ensure you get the right deal.

    Tips for improving your credit score and getting the best deal possible:

    • Make sure you are on the voters list – this will increase your credit score
    • Check your credit report for any inaccuracies and have errors corrected
    • Request the removal of any outdated links to other people (such as former partners)
    • If you are a tenant, take advantage of services such as Canopy or Credit Ladder. These allow your rent payments to be included in your credit report
    • Try to reduce any existing borrowing as much as possible
    • Manage your finances as carefully as possible in the months leading up to the application. Make all bill and debt payments on time, avoid overspending and try not to be overdrawn
    • Speak to a mortgage broker before applying for a mortgage. Any rejected application will leave a black mark on your credit report.

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