How to find a mortgage with poor credit history.
Securing a mortgage deal when you have a less than perfect credit score is difficult. There are lots of reasons why someone may have a poor credit history but this should not stop people purchasing a property. This Mortgage Pirate guide provides valuable tips and tricks to help finance a home when times are tough.
Why is it hard to secure a mortgage with a poor credit history.
To start with Banks and Building Societies base their decision to lend a mortgage on risk.
Risk to a financial institution comes in many forms. It could be a buyer with a small deposit or where the amount being borrowed is many times the applicants salary. Likewise they may decide not to lend because of the type of property being financed or because an applicant may not be in permanent employment. Ultimately they are weighing up the chances of them getting their money back if they have to step in and the property.
Checking someone’s credit history at the point of applying for a mortgage is another way a lender will look to minimise their risk.
Credit Scoring.
All lenders carry out a credit score / search when a new mortgage application is submitted. This is usually completed at the point a decision in principle is requested. A is used to provide confirmation of your borrowing budget before a property has been found. It uses information relating to your income, committed outgoings, address history etc and combines it with a credit check. This often leaves a soft footprint on your credit file. Although some lenders will leave a hard record of their investigation.
Should the credit check not meet the lenders requirements, they may opt to refuse the mortgage application altogether. Sometimes you may be provided with an alternative lending proposition. This could mean increasing the deposit amount, reducing the maximum mortgage amount possible, or by offering a more expensive mortgage product to offset the lenders risk.
What many people do not realise is that their respective ‘credit score’ isn’t the benchmark being assessed by the lenders. I have seen applicants with a credit score of 999 out of 1000 be declined for a mortgage. Even though on paper they are the perfect candidate. This is because the score itself is a simple metric provided by credit reference agencies to summarise someone’s financial status. It doesn’t show the entire story that a lender looks into.
For example, someone previously bankrupt within the last 5 years, had a credit score of 998 / 1000. However, many lenders are unable to assist at all if there has been ANY previous bankruptcy. Therefore, they would reject the application regardless of the credit score.
Lenders internal scorecard.
Instead of relying on a single score to grant a mortgage, lenders instead use an internal point scoring system to assess each of the core areas against their lending model. These can include but are not limited to; total amount of credit accounts active, access to debt (when there are numerous active credit cards all with no / low balances), registration on the electoral register, missed or late payment status entries on a credit account, arrears, defaults, CCJ’s, fraud markers, credit utilisation and appetite for debt.
The factors above are then combined with the details of the application such as the amount of deposit, how much is being borrowed and the source of the income in order for the lender to make a decision on whether or not they will be prepared to lend. This will determine if their internal scorecard is a decline or an accept. Generally speaking, increasing the deposit amount will lower the benchmark result required. So if facing a decline based on a credit scoring issue, ask your lender or broker if increasing the deposit would help.
What to do when a mortgage is declined due to poor credit history?
The first action you should take will be to download a free copy of your personal credit file. Mortgage lenders tend to use two main credit reference agencies when they run their checks. These are Experian and Equifax.
Both of these firms can provide you with a full, 10+ page, copy of your detailed credit report. They both offer a free trial service to obtain this. When working as a broker, I would advise contacting one of these two main providers. Other alternatives are available but often don’t show the kind of detail that will fully help you understand your situation.
Reports will show each active and closed credit file. They also include the balances, payment terms, payment history, any key dates, and the record of repayment. Reports also highlight if accounts have been fraudulently opened in your name. Sometimes the providers may have failed to properly close the account down (mobile phone operators in particular). Checking this report can often highlight important data that people were unaware of. Therefore, it is important to do this regularly if possible and not just when applying for a new mortgage. Pass this report to your mortgage broker as they will determine any specific items that may cause issues.
Ask your mortgage lender for guidance.
Secondly, ask the lender what the reason for the mortgage decline was. Mortgage underwriters can sometimes provide a little more information behind the reason for the decline. However, responses will offer only limited information. Often, they aren’t privy to the information used in the decision making process. Especially if it was a scorecard fail on their internal system. However, they can sometimes highlight a particular issue and could discuss a way to move forward. Especially if the issue caused a marginal decline.
Check the dates of any missed payments / defaults. Lenders can often accept mortgages where there have been missed, late or defaulted payments in the past. The two key factors to consider are the amount, and the date. Some lenders require 6 or 12 months since the most recent late payment was noted on the file. In these cases, applying a few days before 6 months have passed will trigger an automatic mortgage decline.
However, waiting for 6 months and 1 day, can magically convert this into an accept. Likewise, some lenders can ignore defaulted accounts that are below a certain amount. Such as £250 – £500. So, in these cases, reference the date against the lenders criteria to see if an application is worth considering. If not, there will almost always be another lender who can help. Again, use a good broker to do this work for you if in doubt.
Lenders specialising in mortgages for poor credit history.
If a mainstream high street lender is unable to help for any reason, there are many alternatives available. Speaking with a broker could help you unlock a mortgage with one of these providers. They each have different assessment criteria and range from those looking at applications with minor credit issues, to those with long standing or severe credit impairment.
Of course, with a specialist lender you should expect higher interest rates. There may also be larger setup fees and a little more paperwork to provide. This is normal and represents the lenders adjustment to the risk posed. However, as long as the mortgage is affordable, they can provide a great way to secure the mortgage needed.
Specialist lenders offer:
- Consider mortgages where there is a poor credit history. Including defaults, CCJ’s, bankruptcies, debt management plans, mortgage arrears, debt relief orders, or previous repossessions.
- They often carry out a credit search instead of a credit score. This means that a low score isn’t necessarily going to affect the application.
- Have a tiered acceptance structure. This is where the product you are offered will be dependent on the result of the credit search.
- Similar types of products to a mainstream lender.
- Can also consider other applications that don’t fit within normal mortgage lending criteria.
Drawbacks.
- The interest rate payable increases as the level of risk to the lender rises.
- Setup fees can be much higher than more mainstream lenders.
- Valuation fees are normally payable.
- The deposit needed may be higher.
- Limited options available and not found on the high street. Some are broker exclusive lenders.
- There will be more paperwork to submit for assessment.
Look to improve your credit profile.
If you have a poor credit history there are many things that can be done to improve the situation. However, I understand that this is often easier said than done. When applying for a mortgage, the more recent a credit problem is, the harder it is to find a solution. Here are a few tips to help improve your credit file before applying for a mortgage.
- Make sure you are on the electoral roll.
- Maintain payments on your credit commitments on time. If you do miss a payment, contact the provider ASAP to make arrangements as this could avoid a record being entered on your credit file.
- Close any unused credit accounts such as credit cards. Even if a lender sees you have a zero balance, they could assume you will use the card once the mortgage has been agreed.
- Avoid using your overdraft if possible. Sustained overdraft usage indicates financial stress.
- Small payments made on a credit card and then cleared at the end of the month show responsible borrowing. These can improve your credit score quickly. £20 of food or fuel each month cleared in full will help.
- Restructure your debts if possible. Debt consolidation loans can lower your total monthly outgoings and avoid too many active credit accounts.
- Keep an eye on your credit report by using a notification service such as Experian or Equifax. You can then address any new issues quickly before they become out of hand.
- Try to limit the amount of credit searches or checks on your credit file to as few as possible. Multiple credit checks in a short period of time can lower your score and appear as though you are ‘hunting’ for debt.
Summary.
Firstly, although there will be occasions where help is simply not possible this itself provides an opportunity to build a plan of action. Once you understand what the issues are to the lenders you can take steps to overcome them. It may take months or years, but you will eventually get there. The key is to persevere.
Next, a good mortgage broker will be able to explore all your options and provide you with professional advice. Even if you can secure a mortgage deal, this should not be done at any cost. Be mindful of the value that the mortgage offers and weigh it up against your personal needs.
Finally, in life, everything is temporary. Even if the deal you can secure now is not the most attractive, you will have a few years to maintain your credit rating. You may be able to switch onto something more cost effective in the future.
Tell us if you have had trouble finding a mortgage with poor credit history and if you were able to fix the problem. Use our comment form below.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this post is purely for information purposes only and does not constitute advice.
