Can I Get A Mortgage With Bad Credit?

Securing a mortgage is a significant step in anyone’s life, and it’s often seen as a symbol of financial stability and independence. However, for those with less-than-perfect credit scores, the question looms: Can you get a mortgage with bad credit? The answer is yes, but there are certain caveats and many important things to consider.

The Impact of Bad Credit On Mortgages 

There are many factors that contribute to a low credit score, including little or no credit history, missed payments, past financial difficulties, and even moving home regularly. It’s important to understand that different lenders have different criteria for what constitutes bad credit, and while some lenders may view your credit history unfavourably, others may be more lenient. 

The nature of your poor credit history plays a significant role in how it impacts your mortgage application. For example, having a poor credit history can make it challenging to secure a mortgage, as most high street lenders usually require a minimum 15% deposit. Various other factors such as the timing of credit issues, their resolution status, type of debt (secured or unsecured), debt amount, and more can also influence how a lender perceives your financial circumstances.

When you have a poor credit score, you will also likely face higher interest rates and may need a larger deposit when applying for a mortgage. Lenders view individuals with bad credit as riskier borrowers, potentially leading to increased monthly payments.

Getting On The Property Ladder as a Young Person With a Low Credit Score

Starting early to build a positive credit history is crucial. Actions like being on the electoral roll, having direct debits paid on time, maintaining a phone contract, and responsibly using a credit card can help establish a good credit profile. Various government schemes like Shared Ownership, Help to Buy, and ISAs aim to assist younger buyers in entering the property market too.

Getting help from specialised lenders and mortgage brokers who understand the challenges of bad credit can be beneficial. These professionals can offer tailored solutions and help navigate the complexities of obtaining a mortgage, even with poor credit. 

Saving up for a deposit can be tough, especially for young individuals. However, there are various ways to boost the size of your deposit, such as receiving help from family, using inheritance money, or tapping into your savings. Also, consider exploring loans with manageable monthly payments to meet the minimum deposit requirement, without putting a strain on your daily finances or dipping into overdrafts. By taking these steps, you can move closer to achieving your dream of homeownership sooner than you’d previously thought.

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How to save for a house deposit? 

Saving for a house deposit is a significant financial goal that requires years of careful planning and discipline. It’s essential to establish a clear savings target by determining how much you need for the deposit based on the price range of the house you are aiming for. Once you have a specific goal in mind, create a budget that outlines your income, expenses, and savings, so that you can identify areas where you can cut back on spending to allocate more towards funding your deposit. 

One effective strategy to save for a house deposit is to utilise savings accounts/apps. Set up a separate savings account specifically for your deposit fund and arrange for a portion of your income to be automatically transferred into this account every month, week or day. For example, saving £5 a day and putting it towards your savings account will amount to almost £10,000 over five years!

If you struggle to remember to save money, you can automate your savings by setting up automatic payment dates. This way, your savings will grow through compound interest without needing constant manual intervention. Some savings accounts like First Direct and Co-Operative Bank offer 7% interest, while Nationwide provides a 6.5% option. For instance, with a Nationwide savings account at 6.5% interest after 12 months with 12 deposits of £200 each, the estimated balance would be £2484.50!

How Long Does it Take to Save For a House Deposit?

Saving for a house deposit can vary significantly depending on factors like income, expenses, and regional housing prices. For example, research by The Guardian indicates that the average time it takes to save for a house deposit in England has risen to almost 10 years, with soaring private rents and higher house prices adding to the challenge. 

In London, for instance, it could take up to 18.3 years to save for a deposit if living in a flatshare or 27 years if renting alone. The average time for first-time buyers in London to save for a deposit is around eight years, with the average person starting to save at 24 and buying their first home at 32. 

To put this into perspective, saving £180 a month into an average easy-access savings account running at 3.7% could take six years for a 5% deposit, 11 years for a 10% deposit, and over 22 years for a 25% deposit on a house worth £284,950, the average price of a UK house in November 2023. Utilising schemes like the Lifetime ISA (LISA) can speed up the saving process by providing government bonuses on contributions

Using a Guarantor To Help Pay Your Mortgage 

Having a guarantor can enhance the appeal of your mortgage application to lenders, particularly if you have bad credit. Whether it be a friend or family member, the person who agrees to be a guarantor adds their name to the legal documents, agreeing to make repayments if the borrower can’t. 

The guarantor usually has to use their property as ‘security’ – so if neither the mortgage borrower nor the guarantor can make the repayments, then both their homes will be at risk. 

In the eyes of a lender, having a guarantor with substantial collateral can strengthen your financial security. Guarantor mortgages offer the potential for higher loan-to-value ratios, potentially requiring minimal or no upfront deposit, which can benefit individuals with limited savings or poor credit scores looking to enter the property market.

However, not everyone qualifies to be a mortgage guarantor. Some lenders stipulate that a guarantor must have fully repaid their mortgage, whilst others may accept a certain level of equity in their property, such as having paid over 50% of the total amount. However, all guarantors must be homeowners. If a guarantor is still paying off their mortgage, they must demonstrate a sufficient income to cover both their repayments and yours. Additionally, guarantors must maintain a healthy credit report to instil confidence in lenders regarding their financial management capabilities.

Can Applying For a Mortgage Hurt Your Credit Score?

Getting a mortgage is a huge milestone for you, your family, and your credit as it often takes years to build up your credit and finances enough to get approved for a mortgage. But can applying for one actually negatively impact your credit score? Potentially.

Applying for a mortgage can impact your credit score, but the effect is usually minor and temporary. When you apply for a mortgage, lenders conduct a credit check, which typically results in a small drop in your credit score. This drop is temporary and should not significantly damage your credit score or negatively affect a lender’s decision whether or not to offer you a loan.

Once you are moved in and your mortgage payments have started to come out, it’s important to ensure that you keep up with the monthly payments to ensure your credit score remains high. It’s crucial to communicate with your lender if you anticipate missing a mortgage payment. Talking to your lender and explaining the situation may help mitigate some of the negative effects on your credit score. Additionally, before applying for a new mortgage after late payments, it’s advisable to check your credit score and work on improving it if necessary before applying. 

Does the type of late payment I have matter?

The type of late payment you have can impact a mortgage application differently. For example, lenders generally view unsecured late payments as less severe than secured ones when considering loan approvals. 

Unsecured late payments refer to missed payments on credit agreements like mobile phone contracts, credit cards, overdrafts, personal loans, and other debts that lack collateral backing. Lenders perceive unsecured late payments as less severe because they do not involve assets that can be repossessed in case of default. This distinction is crucial in mortgage applications as unsecured late payments are generally viewed as less risky due to the absence of collateral securing the credit agreements. 

Lenders may be more lenient with occasional late payments on unsecured accounts, such as credit cards, compared to secured debts like mortgages or car loans. Secured debts, however,  involve collateral (assets like a home or car), and the risk of repossession is higher in the case of default. Lenders perceive missed payments on these types of loans much more seriously.

While late payments on unsecured accounts can still negatively impact your credit score and may result in fees or increased interest rates, late payments on secured accounts will be viewed more harshly and impact your credit score even more.

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How a Short-Term Loan Can Help

Short-term loans can be beneficial in various financial situations, providing a quick solution to cover urgent expenses and avoid negative impacts on credit scores. These loans are accessible even for individuals with poor credit ratings, offering amounts ranging from £400 to £2500. By responsibly managing and repaying short-term loans on time, borrowers can demonstrate their ability to handle debt effectively, potentially improving their credit scores over time. 

Take a big step towards getting back on track with your finances today with the One Stop Money Shop. Whether you need a short-term loan to cover one of life’s unexpected bills or you’re looking for help securing a mortgage for your dream home, our expert team is on hand to help. 

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