Bad credit mortgage eligibility critera
Having bad credit doesn’t automatically preclude you from qualifying for a loan, however, you can still secure a mortgage, but you may have a harder time doing so.
Most mortgage lenders have stricter requirements for bad credit borrowers to mitigate the risk they pose to them. For instance, they may require borrowers to put down a larger deposit or pay higher interest rates before they can approve a mortgage with bad credit.
With that in mind, what is your bad credit mortgage eligibility if you have a poor credit history? This guide explores everything you need to know about bad credit mortgages before submitting your application. Read on.
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How to qualify for a bad credit mortgage
Mortgage lenders look at three things when assessing a prospective borrower with bad credit.
- What is the reason for your poor credit rating? Mortgage lenders like to look deeper into your poor credit history. They are interested in the reason for your bad credit. Did something unexpected happen during that period, or was it simply a case of financial delinquency? The latter would be harder to explain away.
- How long ago was the issue registered? Did the financial issues leading up to your poor credit rating happen recently or several years ago? The older your bad credit history is, the easier it will be for you to secure a mortgage.
- How serious is the issue? Lenders want to assess the severity of the problem. Is your bad credit because you missed a couple of payments on a loan or utility bill, or did you suffer recent bankruptcy? The latter would be more severe.
It’s important to mention that if you declare bankruptcy, you cannot secure a mortgage until you have been discharged.
This process takes about 12 months. Even then, most mortgage providers prefer to wait at least 3-4 years after the discharge before they can consider a mortgage application. The prospective borrower will also need a good credit history during that period.
It is worth noting that individuals who have had an asset repossessed in the three years leading up to their mortgage application are usually subject bad credit mortgages with higher-than-average interest rates.
The rates on poor credit mortgages don’t remain high, though, they should decrease gradually with each passing year. The longer you can keep up with your financial activity without issue, the lower the perceived lending risk.
Deposit requirements for properties in the UK
The minimum down payment for residential property is 5% if you intend to occupy it. If you’re purchasing a buy-to-let property, the minimum required deposit is 15% of the mortgage value. These rates apply to individuals with good credit and you may struggle to get this type of mortgage with bad credit.
Most mainstream mortgage lenders require individuals with a poor credit history to put down a higher amount in deposit, depending on how old and serious the credit issue is. For instance, someone whose credit file has a repossession on record would be required to deposit 25% to qualify for a mortgage within a 1-3 year period.
Someone with an individual voluntary arrangement (IVA) would have to put down a 10-25% deposit, depending on how long the debt runs. Someone who filed for bankruptcy must put down a deposit of 15-25% in the first three years.
How to get a manageable LTV ratio
Loan-to-value ratio (LTV) is the ratio of the amount you borrow as a mortgage versus the amount you put down as a deposit. Let’s say you want to buy a property valued at £250,000. You put down a deposit of £25,000 and get a mortgage worth £225,000 to pay the rest. The deposit you paid covers 10% of the price of the house, which makes your LTV 90%.
As a rule of thumb, the higher the amount you can pay upfront as a deposit, the lower the LTV ratio, and the lower means better. That’s what lenders look at when deciding whether or not to approve your mortgage application, especially if you have bad credit.
Not many mainstream lenders will accept a 90-95% LTV. However, an experienced impaired credit mortgage broker can help you secure a mortgage with an LTV that low if your bad credit stems from minor issues.
The only condition is that you meet the lender’s other mortgage requirements. For context, a “minor” bad credit issue would be something like defaulting on a mobile phone payment.
If your reason for bad credit is severe, like repossession or bankruptcy, most mortgage lenders will require a larger deposit as a down payment. The idea is to offset the risk you pose to them as much as possible, especially if your credit issues happened less than three years from your mortgage application date.
Some mainstream lenders may require a 50% LTV, which would significantly offset the risk. This means you would have to put a down payment that’s half the property’s value.
Getting a no-deposit mortgage
A no-deposit mortgage means securing a mortgage from the lender without you having to put down a penny of your money as a deposit. While it does sound like a sweet deal, lenders don’t typically offer this option to prospective borrowers with bad credit (or any customer, for that matter).
The only way to get a 100% mortgage is by getting someone to act as a guarantor on your behalf. In this arrangement, the lender would secure the mortgage against a property owned by your guarantor. If they have savings, that’s what the lender would use as the guarantee to act as a substitute for the deposit.
Other bad credit mortgage eligibility factors
Mortgage lenders always look at prospective borrowers’ credit history when assessing their applications. That’s not all they consider, though. Below is a list of factors likely influencing their decision to approve or deny your mortgage application.
Employment status and income
The more money you make, the higher the amount you can borrow, however, the amount of money you make isn’t the only thing a mortgage provider is interested in. They also want to know how you’re making your money and this will be more stringent with bad credit mortgages.
If you’re an independent contractor or hoping to get a mortgage based on commissions or overtime, you might have a harder time securing a mortgage equivalent to the value of the property you’re interested in purchasing. This is especially true if you approach high street lenders.
On the other hand, a bad credit mortgage broker can help you secure a mortgage with competitive terms, even on a low income.
Age
Age also plays a significant role in a lender’s decision on whether or not to approve your mortgage application. Most lenders have an upper limit on the age beyond which they will not cater to borrowers looking to get a property loan.
For some mortgage lenders, this limit is 75. For others, it’s 85. Rarely (if ever) will you come across a lender that doesn’t have an age limit. The idea behind an age limit is to ensure that the borrower can pay off the mortgage in full.
Recurrent expenditure
The other factor lenders look at when determining bad credit mortgage eligibility is your existing expenditure. Some of the things they consider include the number of children you have or any outstanding loans you’re currently paying off. They need to determine whether you’ll have enough money left over to service the monthly mortgage instalments should you secure a property loan, even with bad credit.
Property type
The other thing they look at is the property for which you’re seeking a mortgage with bad credit. If you’re seeking a loan for a property with a non-standard construction, such as a house with a timber frame or thatched roof, there’s a good chance the lender will reject your application.
Mortgage lenders tend to shy away from financing properties that they deem potentially problematic. Such properties may require that you secure a loan from a specialist mortgage lender.
How to increase your bad credit mortgage eligibility
Is there anything you can do to make yourself more appealing to mortgage lenders, especially if you have a poor credit history? The short answer is – yes, you can.
Here are a few steps to improve your chances of securing a mortgage with bad credit
Get ahold of your current credit reports
It’s one thing to know that you have bad credit, but do you understand why? Before you can even think about applying for a mortgage, do yourself a favour and get ahold of your current credit reports. Analyse them to find out what credit issues will still haunt you if you have already resolved them.
Most UK mortgage lenders source credit reports from three main credit reference agencies – Experian, TransUnion, and Equifax. Each of them has information about any previous loans you may have taken, bank overdrafts, credit card bills, and utility accounts.
These reports don’t all display the same information, so you need to comb through each separate credit report and highlight anything you believe is inaccurate. Once you do, get in touch with the respective credit agency and ask them to update your record. They will look into your assertions and update the credit report based on their findings.
Work on improving your credit rating
First impressions matter in everything. Mortgage applications are no different, which is why you need to put your best foot forward to increase your chances of securing a loan.
Now that you have an up-to-date credit report, you know exactly where you stand with regard to your credit rating. Now’s the time to improve an adverse credit score to make yourself more appealing to a mortgage lender when applying for bad credit mortgages. If you are needing a self-employed bad credit mortgage then you should improve your business and personal credit ratings alike.
We recommend waiting at least six months before submitting a mortgage application and using this time to pay off as many outstanding accounts as you can.
Taking this step shows prospective lenders that you’re serious about improving your financial standing. It also lowers your debt-to-income ratio, which, in turn, frees up more capital. This surplus cash can then be channelled towards your mortgage instalments.
Lower your LTV as much as possible
Next, you want to lower your loan-to-value ratio. This means raising as much of the deposit as you can upfront. Making a larger down payment upfront, especially if you have bad credit, reduces the lender’s risk exposure, making it more likely for you to secure a mortgage.
While it can be difficult to grow your savings when you’re elbow-deep in unpaid debt, it is in your best interest to put as much as possible towards purchasing your home if your ultimate goal is to become a property owner one day.
To get the most competitive interest rates from bad credit mortgage lenders, aim for a deposit of 20-25% of the home value.
Don’t make multiple loan applications concurrently
When you have bad credit, securing a loan is a bit like playing Russian roulette with different lenders. Contrary to what you might believe, filing multiple mortgage applications with different providers doesn’t help your cause. If anything, you’re sabotaging your chances of securing a residential loan, and here’s how.
Each time you make a loan application to a mainstream lending institution like a bank, they do a “hard” search to determine your eligibility. Now, this isn’t a problem per se if they approve you for a mortgage. However, if they reject your application, that hard search remains in your credit file.
What this does is signal to other potential lenders that you have trouble securing credit or that you’re looking for more financing.
The best thing to do would be to speak with a bad credit mortgage advisor. They will analyse your credit file and report and link you to a mortgage broker who can help you secure a mortgage through lenders that are likely to approve your loan application.
Find out your bad credit mortgage eligibility status
Poor credit history should not deter you from owning your own home. Our broker-matching service will connect you to an experienced broker who will help you secure a mortgage with competitive terms despite your current financial standing.
FAQ
Am I eligible for a bad credit mortgage if my partner has good credit?
If you’re applying for a mortgage with a lender specialising in joint mortgage applications, you may qualify for a loan. That said, your poor credit history and bad credit rating will still be deciding factors for a specialist lender during assessment and might limit the mortgage deal you would otherwise have leveraged if you and your partner both had good credit.
Can I get a credit issue expunged from my credit report?
Resolved credit issues stay on file for six years, after which they’re expunged. Lenders usually look at how long ago a credit problem was registered and how severe it was when considering whether or not to approve your loan application.
Are first-time home buyers with bad credit eligible for a mortgage?
While most mainstream lenders consider first-time buyers high risk, it doesn’t preclude you from getting a bad credit mortgage if you have a poor credit record. You might have to put down a higher deposit and show good faith by settling as many outstanding accounts as possible.
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