When you apply for a mortgage, lenders look at your credit history. If you have a good history of borrowing and repaying loans on time and in full, your credit history will be good and lenders will consider you a reliable customer. But, if you have a bad credit history or an unfavorable credit history, they are more likely to hesitate because they cannot be sure that you will repay the loan as promised.
Types of Adverse Credit
Many factors can contribute to poor credit and thus cause lenders to label you high risk. Here are some of the most common.
Defaults, or missed payments, refer to not paying the money you owe on time. You may have missed paying phone or utility bills, or missed the deadline for a installment payment on a loan.
Debt management plans
When a person finds themselves heavily in debt, they can receive a debt management plan. These plans allow you, for example, to repay your debts in more affordable and very long-term installments. However, these payments will often be labeled as defaults on the person’s credit history, resulting in adverse credit.
County Court Judgments (CCJ)
If someone gets into debt, it can reach the point where a court must order them to repay the outstanding amount. When this happens, it wreaks havoc on their credit score.
If someone has bankruptcy on their record, a high street lender is very unlikely to approve them for a mortgage. Some specialist lenders might still consider granting a loan if the bankruptcy dates back more than six years and it can be proven that the person has made good financial improvements since then.
Can I get a mortgage with bad credit?
The short answer is yes – you can get a mortgage with bad credit, but it’s not easy and your options may be limited.
- First, you need to do everything you can to improve your credit history and prove that all previous issues that caused your bad credit have now been improved. Making sure your household bills are paid on time for a few months is a great way to start the repair process.
- If there is a specific and reasonable explanation for your poor credit – especially one that no longer affects you – you can add a correction note to your credit file to notify lenders. For example, if a layoff or illness caused you to miss bill payments for a while, lenders might take a lenient stance.
- You need to prove that you know how to spend your money responsibly. It is therefore a good idea to set a tight budget in the months preceding a mortgage application.
- It is also possible that a guarantor will help you obtain a mortgage. This is someone with good credit who promises to cover you financially if you ever fail to repay the loan.
- If you’re buying with a partner, their good credit may be enough for the lender to overlook your own bad credit.
- It is possible to improve your credit score by proving that you can reliably repay your loans. To do this, it is advisable to take a credit card and use it once a month for grocery shopping and instantly pay off the card from your current account. Over the months, this reliable borrowing and repayment model will dramatically improve your credit score.
- If none of this helps convince lenders that you’re trustworthy, it might be wise to step back and wait a bit. Imperfections on a credit score may seem less severe over time, especially if you’ve managed to improve your financial situation since then.
- More importantly, you need to be honest with mortgage providers. If you try to hide bad credit, the consequences are far worse than simply acknowledging the problem and proving you’re working hard to fix it.
Revolution Brokers Founding Director Almas Uddin comments: “In any period of economic instability, we will always see mortgage lenders tightening their belts, which means those with poor credit are likely to have a much harder time negotiating. the process of securing a mortgage.”
“But don’t lose hope because bad credit can be fixed. It may take considerable time, effort and sacrifice, but if you’re hoping to buy a property, it’s more than worth it.
He adds: “Mortgage providers aren’t there to refuse to lend money – they want to give you a mortgage, but when the economy is struggling they have to be more careful than usual. So if you can show signs of improving your financial situation and managing your money well, you still have a good chance of getting a mortgage and getting your foot on the property ladder.
“There’s absolutely no shame in having bad credit – it happens to a lot of people for many different reasons – so the best thing you can do is face the situation you’re in and take action. small practical steps to improve yourself slowly but surely.”