Guide to bad credit mortgages
Millions of aspiring home buyers, home movers and remortgagors are excluded from the mainstream mortgage market and its competitive deals, because they don’t have the spotless credit history demanded by the high street banks and building societies.
Having been roundly blamed for the financial crisis, forced to keep large cash reserves and bound by tighter than ever statutory regulations, you can hardly blame lenders for being picky about who they lend to.
Two recent sets of regulation, one set introduced in 2014 and the second in March 2016, force lenders to impose tighter lending criteria on borrowers than had previously been the case. While this protects us from borrowing more than we can afford, it also makes it tougher to get a homeloan.
These stricter lending criteria combined with a more cautious overall approach means that large lenders using automated systems cannot assess all of the nuances in a mortgage application in the same way a trained underwriter might.
The result is that some creditworthy borrowers can be sifted out during the application process because they don’t fit the lender’s standard mould, including many people with a previous credit blip, self-employed applicants and those with a complex income.
If you are rejected from a mainstream mortgage lender, where can you turn?
Meet the specialists
The good news is, these days there is plenty of help at hand. They may not be household names like the high street banks and building societies but specialist lenders provide mortgages to those borrowers who fall outside of mainstream lending criteria, including those with damaged credit histories.
They operate in niche markets, have underwriters assessing cases individually, and understand that a one-size-fits-all lending policy doesn’t suit many borrowers. These specialists don’t have branches, but they are backed up by an army of professional mortgage advisers, who guide their clients to the right product from the right lender.
But since many don’t operate directly to the public, you won’t see their advertising in the press, you may not recognise their names, and you will need to visit a broker to access them.
Before the credit crunch there was a raft of lenders offering ‘bad credit’ mortgages to those with previous and existing credit problems, including bankruptcy and serious arrears.
This sector of the market was all but wiped out during the downturn, with many lenders closing down, but there are still mortgage options available for those with minor or moderate past credit problems, particularly if they are now resolved.
Be prepared to pay a higher rate of interest for these specialist mortgages as well as higher fees.
David Hollingworth, spokesperson for L&C Mortgages explains: “Mortgage rules have tightened substantially and lender requirements and criteria are far tougher than they were compared to the peak of 2007. Mainstream lenders will often take a very dim view of any credit problems.
“Some specialist lenders can offer mortgages to those with a blip on their credit record, especially when the borrower is getting back on track. Rates will be higher than for mainstream borrowers, but once a good track record is rebuilt they will be able to get back onto standard rates.”
The first step is to check your own credit file with a credit reference agency such as Experian or Equifax to see what the lenders see when they run a credit check. You could have Country Court Judgements against your name that you are unaware of, particularly if you have frequently moved house.
If you have credit problems, are self-employed or have complex income streams (such as commission-based income or you receive large bonuses) this can make it harder to find the right lender and as a result independent advice can be extremely valuable.
Hollingworth says: “As well as being able to tailor the advice according to the specifics of the case, brokers will be able to talk to lenders about any quirks. That can save a lot of wasted time, cost and heartache in finding a lender that is likely to be more amenable, and some specialist lenders will only offer their products through advisers.”
Alex Hammond, spokesperson for specialist mortgage lender Kensington, agrees that a mortgage adviser is the best options for those who fall outside of mainstream lending criteria, whatever the reason. He says: “If you are self-employed, a contractor, would like to include bonus or overtime in your affordability assessment, or even if you have had credit problems in the past, there are lenders that are able to consider your application.
“Some of these lenders are available direct to consumers on the high street, but many will only be available through a regulated mortgage adviser. It is therefore worth seeking the advice of an adviser who can talk you through the most appropriate mortgages for your circumstances and also give you access to a wider selection of lenders.”
Not all borrowers are the same, but luckily not all lenders are the same either, and you could find a mortgage solution out there if you look in the right place.
Check your credit rating
If your mortgage application has been rejected, or you simply suspect that you may have a bad credit rating, you can access your credit record via one of the following:
Once you have access to your credit report, check that all the details are correct. Regularly checking your report will help you spot any mistakes and allow you to ensure you do not fall victim to identity theft.