If you’ve missed payments on a credit card or maybe defaulted on loans, you may have been told that you won’t be able to get a mortgage, but is that really the truth? Can you secure a mortgage despite bad credit?
What is Credit?
Credit is where a borrower receives something of value now and agrees to repay the lender at a later date, often with interest.
When you borrow money from a bank or a finance company, such as a credit card, loans, leasing vehicles, or even high-street store cards, you are essentially starting a line of credit.
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What is Bad Credit?
When you make an agreement with the lender, you agree to make the payments on set dates until the credit has been repaid.
If you don’t make the payments on time, this is recorded on your credit report as missed payments, or it can escalate into more severe issues if not brought up to date.
When you’re in this position, you are deemed as having adverse credit.
Types of Bad Credit
Missed Payments
This is the least damaging form of ‘bad credit’ and is caused when the borrower misses the payment date for their loan.
Most mortgage lenders will accept 2–3 missed payments within the last 6–12 months before considering rejecting mortgage applications.
Specialisit lenders may accept more missed payments, but you will have to speak to an adviser to find the best option.
Defaults
A default happens when the borrower has continuously failed to make payments.
If payments are overdue by three to six months, the lender will close the account and mark it as a default on the borrower’s credit report.
This record can stay on the borrower’s credit file for six years, even if the debt is later settled.
Most lenders at this point will try and collect the full loan amount at once or sell the debt to a debt collecting agency.
County Court Judgment (CCJ)
A CCJ is a court order is given when a borrower fails to repay the money they owe.
If the borrower repays the full amount within 30 days, it won’t appear on their credit file. Otherwise, it stays there for six years, making it harder to get credit.
Lenders view CCJs as a red flag, as it gives an impresion of payment issues.
Individual Voluntary Arrangement (IVA)
An IVA is an agreement between the borrower and the lender to pay back debts over a set period.
While it can help manage debt, as the monthly payments are signifcantly lower, having an IVA on your record reduces your chance of getting a mortgage until it is completed and some time has passed.
Specialisit lenders may accept active IVA’s, such as Loughborough Building Society and Norton Home Loans, but you will pay higher interest rates.
Bankruptcy
Bankruptcy is a status given to people who cannot repay their debts.
It has a severe impact on your credit file and usually remains on it for six years
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Most lenders will not offer mortgages to people who have been declared bankrupt until at least 3 years after discharge.
Specialisit lenders may accept bankruptcys that are over a year such as Bluestones Mortgages.
Debt Management Plan (DMP)
A DMP is another form of agreement to repay debts at a more affordable rate.
While it can help reduce debt, being on a DMP, like an IVA, it gives the impressions of financial difficulties to mortgage lenders.
Some specialist lenders may still consider applications from borrowers in or recently out of a DMP.
Other Factors That Can Affect Your Credit History
In addition to the major credit issues above, lenders also consider smaller or less obvious factors, such as:
- High credit use (using most of your available credit limit)
- Frequent applications for new credit (making you appear desperate for credit)
- Financial links to someone with bad credit (joint accounts or loans)
- Errors on your credit report (such as incorrect addresses or outdated information)
- Lack of credit history (having no borrowing history can sometimes be as damaging as bad history)
Can You Secure a Mortgage Despite Bad Credit?
The good news is that having bad credit doesn’t automatically mean you can’t get a mortgage.
While it might limit your options with mainstream banks, many specialist lenders and bad credit mortgage brokers are willing to help borrowers with poor credit histories.
You might need a larger deposit, pay a higher interest rate, or provide extra documentation, but mortgages are still possible.
Frequently Asked Questions
What deposit size would I need for a bad credit mortgage?
You will usually require 15% – 25% deposit depending on the severity.
What are the costs?
With adverse credit mortgages, they usually carry more fees such as valuation fees and application fees.
What will the interest rate be on a bad credit mortgage?
depending on the severity of adverse credit, it could be anywhere between 5% to 15%.
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