Can I get a mortgage if I have bad credit?
If recent years have taught us anything, it’s that our finances are often much more fragile than we think, and it doesn’t necessarily take much for things to come falling down around us like a house of cards.
A redundancy, a separation, or an unexpected illness for example – any of these could result in your finances becoming overwhelmed, payments becoming unmanageable and your credit score taking a hit. And it often comes as an unpleasant surprise to a lot of people that, even after you’ve righted the ship and things have improved, your credit file may not recover so quickly.
What counts as a negative indicator on my credit file?
There are a few ways that credit providers mark accounts as “bad” on your credit file. The most common indicators you might see are: missed payments, a default (which is where payments have been missed for 6 consecutive months), a County Court Judgement (CCJ), a Debt Management Plan, an Individual Voluntary Arrangement (IVA) or a Bankruptcy.
These negative markers will stay on your credit file for 6 years from the date they occurred.
It’s worth bearing in mind that there are also some things that, while not necessarily bad in themselves, may still negatively affect your credit file. For example, a lot of mortgage lenders aren’t comfortable lending to anyone who has taken out a payday loan in the last 12 months, or to someone who keeps their credit cards permanently maxed out – even if they’re not exceeding the credit limits.
Why do negative indicators on my credit file even matter?
Think of your credit file like a report card. For example, imagine you lent a friend £500, agreeing they’d pay you back in £10 per week instalments. You mark a book each week confirming whether they’ve paid or not. A year later, the friend asks your cousin to borrow money. Your cousin requests to see the book, so that they can understand how reliable your friend was at paying you back. If the friend paid each £10 instalment to you on time, your cousin can be confident that they’ll get their money back, no problem. Whereas if the book shows that your friend forgot to pay, or missed lots of payments, your cousin might feel as though they’re taking too great a risk, and may struggle to get their money back. It’s exactly the same with a credit report and how lenders use it.
So what does this mean for my chances of getting a mortgage?
The good news is, a blip on your credit report doesn’t always mean that you’ll be turned away by mortgage lenders. Even the big high street lenders are open to applications from those with a small amount of adverse credit history. Banks’ lending criteria is created by human beings after all! So they are able to understand how easy it is for a person to fall on difficult times.
The trick is finding out which few of the many lenders out there are able to consider your specific circumstances.
How, when, what, why, who?
To bust a popular myth: mortgage lenders aren’t interested in the “score” that you’ll see at the top of your credit file – that score is really just for your reference, so that you can easily understand at a glance how your own report ranks using a scale of 1-999. It doesn’t really mean anything to a mortgage lender.
Instead, lenders decide whether or not to lend depending on what the credit blip was, how long ago it occurred, how much it was for, and whether there were any extenuating circumstances.
Which is where a good, experienced, whole of market mortgage broker can really be worth their weight in gold to you. Any decent broker will request a copy of your credit file from you as the very first step, and review it thoroughly to make sure they understand your situation fully.
They’ll then search the mortgage market to find out which lenders criteria might match up with your unique circumstances, and provide you with the best option for your credit profile.
When it comes to adverse credit, you’ll sometimes find that, even if the high street lenders say no, there might be more specialist lenders that are still willing to help. However, the perceived increased risk that the specialist lender is taking, is usually reflected by the higher interest rates that they charge – and by some more than others! So having a broker who can access the entire mortgage market and compare it to ensure you’ve got the best possible deal is absolutely crucial – and could potentially save you thousands in interest across the lifetime of your mortgage.
Make a plan
Of course, sadly it can sometimes be the case that a person’s adverse credit simply falls outside of any mortgage lender’s policy. For example, if the credit blip is still very recent.
But it’s important to remember that all is not lost! Your credit profile will improve over time as the blip gets older and you build up a good payment history. Your credit file just needs a chance to recover.
So if it turns out that it’s not possible for you to apply for a mortgage immediately, a good broker can help you to figure out when you’d likely be able to apply and give you some advice on what steps you should take next, so that you can set a target date for applying and work on building up your credit file and mortgage deposit in the meantime.
Helen Peel – 22nd February 2023