Looking to take your first step onto the property ladder? If you’re ready to ditch the renting game and buy your first home, there are plenty of things to consider. Of course, one of the most important factors here—aside from your deposit—will be your credit score.
You might think bad credit is a red mark on your record that you just can’t shift. However, having a poor credit score doesn’t necessarily mean that you won’t ever be able to get a mortgage. That’s not the case. While landing the loan will be harder (and there’s no denying that fact), there are ways to improve your chances of getting a mortgage with bad credit.
If your credit score has got you down in the dumps, let’s dive in and find out what you can do about it and how you can work towards your dream home.
What is a ‘bad credit’ mortgage?
First things first, let’s talk about a ‘bad credit mortgages’. This term gets thrown around a lot, but is often misunderstood.
Technically, a bad credit mortgage is just a mortgage, like any other. The main difference is that these types of loans will usually have higher interest rates than standard mortgage packages. That means that you will end up with higher monthly repayments and more interest to pay.
Additionally, ‘bad credit’ mortgages often require a higher deposit. This is because the lender will probably consider you a high risk - as in, they may worry that they won’t get all their money back. To mitigate this risk, they may insist a higher deposit is needed.
This could force you to spend longer saving for this lump sum before you can hop onto the property ladder. While saving up thousands and thousands isn’t viable for everyone out there, it could be one route to gaining a mortgage regardless of your bad credit score.
How to get a mortgage with bad credit
So how do you go about getting a mortgage with bad credit? Here are a few actions to take.
Step 1: Find a mortgage broker who specialises in bad credit mortgages
A good place to start when trying to get a mortgage when you have bad credit is to speak to a mortgage broker.
This is because mortgage brokers will be able to look at your finances and credit history before predicting whether or not you’re eligible for a mortgage with bad credit.
If they say ‘yes’, great! You can go ahead and apply for a mortgage with your broker’s help. If they say ‘no’, you may have to postpone your mortgage application until your financial situation has improved.
Will I have to pay for a mortgage broker?
While some mortgage brokers charge a fee for their services, thankfully there are plenty of free brokers who can help you out. The best thing is that free doesn’t mean ‘not as good’.
I used the mortgage broker Habito when applying for my mortgage back in 2017 and they’ve gone on to become one of the biggest and most trusted lenders in the UK.
How do I find a mortgage broker?
A quick Google search will bring up a number of other mortgage brokers, from Trussle to L&C, who can help you get a mortgage with bad credit. Many fee-free mortgage brokers operate exclusively online, but there are others that have branches you can visit in person.
You could also choose a local mortgage broker. Whether they charge a fee or not will vary from one mortgage broker to the next.
What information will I need to give my mortgage broker?
You will need to provide details of your income, any commitments that you have, and your credit score. Armed with that information, your broker will be able to work to get you a mortgage.
A good mortgage broker will do the following:
- Assess your income to determine how much you can afford to borrow
- Consider the impact your bad credit history could have on your ability to get a mortgage
- Compare dozens (or sometimes even hundreds) of mortgage deals
- Rule out any mortgage lenders that are notorious for having strict policies
- Present you with a small list of the mortgage lenders most likely to approve your mortgage application
If you’re happy with the mortgages your broker shows you, you can go ahead and apply for a mortgage.
The mortgage broker will carry out much of the process on your behalf, so you won’t have to worry about filling in endless forms or calling lenders yourself!
Step 2: Improve your credit score ahead of your application
If your mortgage broker doesn’t think you should apply for a mortgage just yet or you’re unhappy with the mortgage rates you’ve been offered, it’s a good idea to spend some time improving your credit score.
Unfortunately, you can’t overhaul your bad credit score overnight. However, you can make small changes that will help along the way.
Here are a few steps people with bad credit can take to improve their credit rating and boost their chances of getting a mortgage.
- Pay off your debts
If you have existing credit card debts or outstanding personal loans, it may be worth using some of your savings to pay these off. This is something to speak to your mortgage broker about. Although it can be frustrating to use some of the money you saved for your house deposit on debt, it could increase your chances of getting your mortgage approved in the long run.
- Register to vote
While this tip may sound bizarre, being on the electoral register could instantly improve your credit score. This is because it helps credit referencing agencies such as Experian, Equifax and TransUnion to confirm your identity and keep your credit report up to date and accurate.
- Check unused cards and accounts
Do you have any credit cards that you don’t use? In some cases, closing them could make it easier for you to get a mortgage.
This is because lenders sometimes worry that existing lines of credit could be used to run up a lot of debt, making it harder to pay your monthly payments on your mortgage.
However, if you depend on a line of credit that you already have, such as a credit card with a good interest rate, it may be wise to keep this open. If you needed to get a new line of credit, you may struggle to get a good interest rate and affordable terms, now that your credit score is low.
This is another one to talk to your mortgage broker about!
- Keep up with your bills and payments
Are you paying those bills on time? One of the best ways to build a positive credit score is to keep up with your bills and any other repayments. Try to be as organised as possible and make your repayments on time and in full.
Step 3: Consider waiting to save for a larger deposit
Here’s the kicker. As we’ve already mentioned, to gain a ‘bad credit’ mortgage, you may need to put down a larger deposit. Usually, the smallest deposit available for borrowers in the UK is 5%, but this is unlikely to be available to those with a bad credit rating.
If you have bad credit, you’ve got a county court judgement (CCJ) or you’ve had debt management plans before, you may need to put down a deposit of 25% or more to get a mortgage.
Since the average cost of UK home is currently £268,349*, that means that you may have to save around £67,087. Jesus. Christ!
* at the time of writing in February 2022
TL;DR….
Getting a mortgage when you have bad credit is possible. However, there are a few things that you need to compromise on here and the process may be longer than you expect. Use this guide as a starting point and get independent advice from a mortgage broker.
