Brits find it harder than ever to get on the property ladder, as economic uncertainty, a tough jobs market, and debts stand between young families and their dream homes. Bad credit makes finding a mortgage hard, but not impossible. Understanding this topic is an important but surprisingly uncommon thing: almost half of all British citizens have never checked their credit score. Understanding your credit score, the factors shaping it, and its relationship to your mortgage prospects offers a sensible path to the ideal mortgage solution.
What Is A Credit Score?
Rather than a test to pass, mortgage brokers see credit ratings more as a financial history record. Credit scores measure your earnings, savings, expenses, and debts. Mortgage brokers pay particular attention to your past relationship with borrowing and repaying money. They measure the quantity and quality of your loan repayments in the past. They then use this record to inform their decisions about whether to offer a mortgage, and what sort of mortgage to offer.
Various websites offer credit score checking services, offering an idea of your financial history. However, most lenders use their own systems of credit checking, to assess whether they believe a prospective mortgage holder has good or bad credit on their own terms. This makes it hard to compare credit ratings or scales between systems.
While it’s tough to put a number on where you need to get to for a good credit rating, many systems share common factors. Understanding these factors helps borrowers get to grips with their credit. When you know what makes credit scores worse, it becomes easier to improve your rating.
What Causes Bad Credit?
Mortgage brokers use credit ratings to determine contracts for loans. Therefore, credit ratings focus on your previous contracts and your previous loans. Common reasons for low credit ratings include past loan defaults or late repayments. Bankruptcies, particularly those in recent years, also create negative impacts on credit scores. Financial difficulties such as property repossession suggest to mortgage brokers that your application to borrow may be a cause for concern.
In general, the later the repayments, and the larger the debts, the lower the credit rating. Many mortgage brokers also mention CCJs (County Court Judgements) as a major contributor to low credit scores. Courts issue CCJs when lenders prosecute late repaying borrowers for outstanding debts. CCJs, therefore, show mortgage brokers that borrowers are so unreliable that courts have intervened to enforce repayments.
When calculating a credit score, many lenders also look at the number of previous loans in your financial history. The more regular your loans and repayments, the better your credit rating. Slow repayments, or no repayments at all, make it hard to build a decent credit rating.
Beyond slow loan repayments, other financial disputes and inconsistencies can lower credit scores, often without you even knowing. Late payments for utilities, phone contracts, or other subscription services can also wipe points off a credit score. While these may only manifest as a small impact on good or bad credit, they add up over time. This cumulative effect could form a huge financial obstacle between you and your future home. With stakes this high, it’s important to keep credit checks on the agenda.
How Does Bad Credit Affect A Mortgage?
People with bad credit can still get mortgages. However, mortgage brokers can also decline to offer mortgages to people with bad credit. As mentioned, different lenders use different systems to calculate credit. Many also enforce minimum requirements for credit lending, and if you don’t pass the requirements, they won’t offer you a mortgage.
This doesn’t mean you won’t get a mortgage anywhere: often, prospective homeowners shop around to find a mortgage solution that suits them. Certain mortgage providers, known as sub-prime lenders, specialise in working with low credit rating borrowers. Within reason, there’s normally a lender to suit everyone’s need.
However, bad credit has a greater impact than simply deciding whether or not a borrower is allowed a mortgage. It also determines the type of mortgage on offer. Bad credit scores often increase the deposit required for a mortgage and make the mortgage rate more expensive.
Candidates with a perfect credit rating can expect to pay a mortgage deposit of around 5 to 10% of the property value. Depending on just how bad a bad credit score is, candidates with unreliable financial histories are more likely to pay 20 to 25% of the property value as a deposit, or even higher.
However, credit scores change over time. Low credit scores heal with regular and reliable financial activity, and several steps can help the process along the way.
How Can I Improve My Bad Credit Score?
Building a credit score takes time, and can be a slow and frustrating process. However, when broken into simple steps, credit rating improvements become simple and rewarding. Bad credit scores stem from financial disputes and inconsistencies.
The best way, therefore, to create a sustainable credit rating is through consistent and responsible loans and repayments. Improving credit scores involves changes to financial behaviour, both in small and large actions and transactions, over time.
Easy Steps To Improving Your Credit Score
Some lenders pay close attention to your reliability and accessibility, so regularly updating your address and contact details can improve your rating on the small scale. Keeping a close eye on monthly outgoings also ensures you know where your money is going, and how to manage it reliably.
For starters, only sign up for subscriptions or loan repayment structures when comfortable in the knowledge that you can repay them over time. Paying off debts and staying within your overdraft limit helps improve your credit score and stabilise your finances. Keeping on top of budgets and bills helps prove your financial responsibility to lenders and mortgage brokers. This speeds up your journey to a favourable mortgage rate on a new home.
You may have a legacy utility bill you’ve forgotten about, or a forgotten subscription burning a hole in your bank account and your credit rating. Opening a credit card account, and regularly moving money in and out of it, also helps prove your reliability and build your credit rating.
Of course, only choose these measures if you are confident that you can afford them, or you risk making your rating even worse. Getting these things in order speeds up the process of credit rating recovery. Even extremely negative financial history, such as a large default, can be cleaned from your record with a couple of years of responsible loaning and repayments. In the meantime, other measures can help borrowers negotiate a mortgage even with a bad credit rating.
How To Get A Mortgage With A Bad Credit Rating
Financial stability increases your chances of getting a mortgage, even with a bad credit rating. Credit rating does not always correspond to wealth or stability, as some rich people have bad credit ratings and vice versa. Proving the health and sustainability of your income increases your chances of getting a mortgage, even with a sub-prime credit score. Saving up for a large deposit also suits you better for a mortgage specialised to borrowers with lower credit scores.
As savings and good credit scores accrue over time, you might be better off discussing longer terms with a mortgage broker and working out a plan together in a longer time frame. Preparing for mortgage brokering meetings, extensive research, and a firm grasp of your credit rating and the factors shaping it all support mortgage negotiations.
Can You Remortgage Your Home When You Have Bad Credit?
Again, anything is possible in finance, but a bad credit rating may make the circumstances more difficult. Remortgaging may be a simple way of liquidating assets. However, a bad credit rating can result in steeper interest rates and other increasing fees.
As larger deposits increase the likelihood of a mortgage with bad credit, large amounts of equity improve the terms of a bad credit remortgage. Therefore, having a large share of equity in a home provides the best way of re-mortgaging with a low credit rating. Specialised low credit mortgage brokers can also negotiate these terms and come to an ideal solution.
Plan For A Successful Mortgage No Matter Your Credit
As with any financial decision, preparation and thorough planning prove essential for managing a mortgage, especially with a bad credit score. Many mortgage brokers advise that prospective mortgage holders carry out regular credit checks, and carefully monitor changes and improvements in their ratings. Ideally, you should aim for regular credit reports, to inform your decisions and your prospects.
Discussing your credit rating and your options with an experienced and specialised mortgage broker will also help optimise your financial solutions to acquiring the ideal mortgage.
Gathering knowledge, saving a deposit, and improving your credit score will all help to get you there. Many people with sub-optimal credit ratings improve their scores, and many find an affordable mortgage even with a low score. The right broker and the right action plan can provide vital tools for a personalised mortgage.