The most common bad credit mortgage questions, answered.
Finding a suitable mortgage lender if you’ve got bad credit can be more like a marathon than a sprint. The best lenders aren’t your run-of-the-mill bank or building society, either. They’re specialists in the bad credit market and make their lending decisions case by case.
Below you’ll find a list of the most common questions asked about bad credit mortgage lenders by our clients.
1. What is a bad credit mortgage?
A bad credit mortgage is the same as any other mortgage, except for the fact that it is designed for those with poor credit scores. If accepted for a bad credit mortgage, you pay interest on the loan and make mortgage payments monthly - just as you would if you are a borrower with a good credit score and an ordinary residential mortgage.
2. Can I get a bad credit mortgage from a high street bank or building society?
Yes, it is possible to do, but there are some drawbacks. Their criteria for lending is more strict, so it’s more likely for your application to be rejected. If it is rejected, it will harm your credit score further. Whilst a good mortgage advisor will always check the major mortgage lenders, those advisors that specialise in sourcing bad credit mortgages will also check the bad credit mortgage lenders that are not accessible to everyone.
3. What is a bad credit mortgage lender?
A bad credit mortgage lender is a financial institution that specialises in providing mortgages to people with bad credit scores (and perhaps a history of poor financial management). There are several types of specialist lenders, each offering different mortgage products that will suit different financial situations and needs.
4. Who are the best bad credit mortgage lenders?
Most bad credit lenders are good, but they each specialise in different financial issues. If the reason for your bad credit is, for example, CCJs, you would be best served by a different lender to another applicant who is currently in a debt management plan. The choice of which bad credit lender to use depends upon your unique situation.
5. Can I apply direct to the bad credit mortgage lender myself?
Unlike lenders in the mainstream market, the majority of specialist lenders will not deal with a consumer directly. They expect you to have a mortgage broker guiding you to the best lender and the best product for you.
6. I’ve heard that I will have to pay a larger deposit if I have bad credit. Is this true?
Most of the time, yes. With a good credit score, you may only need to pay a deposit of 5%. Lending to a customer with bad credit incurs a higher risk of default, therefore lenders normally ask for a higher deposit. This provides a cushion should the lender need to repossess your home.
7. Are interest rates higher on bad credit mortgages?
Interest rates are usually higher on bad credit mortgages. However, consumers are benefitting from increasing competition in this market, meaning some rates are now comparable to those offered in the mainstream mortgage market.
8. Will I have to stay with the specialist lender until the end of the mortgage term?
No. If you make your mortgage payments on time every month, your credit score will improve (of course, providing you keep all of your other bills and debts in good order). After time, with an improved credit score, you may be able to move your mortgage to a high street bank at a more favourable interest rate.
Don’t forget though, that when applying for a mortgage (or remortgage), your application will be assessed according to a variety of factors including your credit score, income, home value, and the equity in your home. Affordability will also be assessed.
Whenever you apply for a mortgage or other credit facilities, it is worth using the strategies that we’ve outline in our article: ‘How to improve your credit score’
9. How much could I be loaned by a bad credit mortgage lender?
This is a tough question to answer, as each lender has a different way to calculate what they will loan. However, as a rule of thumb, the mortgage amount will typically depend on:
Your income
Your outgoings and spending
The value of the property you wish to buy
Generally, as a multiple of your earnings, you may be able to borrow around 4 to 4½ times your income. For example, if you earn £50,000 per annum, you could borrow between £200,000 and £225,000. With this said, the actual loan offered to you may be higher or lower than this multiple, depending on other factors.
10. What other factors do bad credit mortgage lenders consider?
The lender will also consider the details of your credit file - they will want to know what happened and why. For example, a CCJ will be considered differently to a late payment on a credit card account. This is another area in which bad credit mortgage lenders are different from other mortgage lenders - they examine individual cases in more detail, to understand the borrower better when making a risk-based judgement.
If you have a bad credit score and are looking to get a mortgage, contact Mortgage Thoughts today. As ‘whole of market’ advisors, we aren’t tied to any particular products or providers, therefore we are free to select mortgages from all the different providers without bias. This means you can rest assured knowing that whatever we suggest, we have your best interests at heart.
