Having poor or bad credit doesn't always mean you won't get a mortgage, but it can affect the options available to you. We explain how adverse credit can impact your ability to get a mortgage and what you can do in this guide.
Before we delve into the complex world of lenders, poor credit mortgages and remortgages, it’s important that we first explain how credit works and what credit score you would typically need to get a mortgage and/or buy a house in the UK. This will give you a better understanding of how bad credit could affect your ability to get a mortgage.
What Credit Score Do You Need for a Mortgage?
How Credit Scores Work
Your credit score is a 3 digit number based on your borrowing and financial behavior within the last 6 years. It’s provided by a credit reference agency, and is categorised as very poor, poor, fair, good, very good or excellent.
Things that can result in a low or bad credit score include:
- Missing mortgage payments
- Paying bills late or not at all
- Relatively high levels of debt – excluding student loans
- Regularly maxing out credit cards
- Not registering on the voters roll
- Receiving CCJs (county court judgement) or defaults
- Not having much of a payment or credit history – i.e. not building up a record of regular, punctual payments
- Declaring bankruptcy or entering into an IVA (Individual Voluntary Agreement)
These all apply to the last 6 years since all payment history - including CCJs and defaults - automatically “drop off” your credit file after 6 years. So, if you missed a mortgage payment but it was over 6 years ago, it won’t affect your credit score or even show on your current credit file.
What Credit Score Do You Need to Buy a House with a Mortgage in the UK?
There’s no set credit score for a mortgage. Lenders use the information credit reference agencies have about your credit and payment history, but they don’t rely on the scores they give you.
When your lender puts together your DIP (Decision in Principle), they gather information from credit reference agencies, look at your payment history and review the answers you give to the questions on your DIP. They then come up with their own credit score for your application.
Although credit scores from credit reference agencies have no direct influence on your mortgage application, they can be useful indicators as to the current state of your credit profile. A very good or excellent score from a credit reference agency suggests an increased likelihood that a lender will accept your mortgage application, which means you’ll have more and better deals available to you. It’ll be harder securing a good deal with a fair or even good credit score.
Can You Get a Mortgage or Remortgage with Bad Credit?
It is possible in the UK to buy a house or remortgage with poor or bad credit, but your choice of lenders will be limited and the options available to you will depend on the nature of the poor credit and how recent it was.
For example, we still may be able to find you a suitable lender if you were previously declared bankrupt but it was discharged 3 years ago, or you only had CCJs or defaults due to a few missed credit card or mobile phone provider payments.
This might also be the case if you missed one or 2 missed mortgage payments that were cleared over 6 months ago.
The first step, if you suspect you could have adverse credit, is to obtain a copy of your credit file from a credit reference agency. Once you know what’s damaging your credit score, you’ll be able to find out what options are realistically available to you and what you can do to improve your chances of securing a mortgage.
Why Does Poor Credit Matter to Mortgage Lenders?
A very good or excellent credit history illustrates your ability and willingness to meet regular commitments, like a mortgage. It’s more difficult to get a mortgage with a poor credit rating as it may indicate that you’re unable to keep on top of your finances.
Mortgages and Remortgaging
The maximum LTV (loan-to-value) available to a person with a poor credit history is usually lower than to someone with a very good credit history. You’ll likely be limited to a maximum LTV of 85% if you have a history of poor credit, compared to the maximum LTV of 95% for borrowers with very good credit histories.
Interest rates on adverse credit mortgages and remortgages are also typically higher than those on standard products for the same reason.
Finding a mortgage for a first-time buyer with poor credit can be difficult. The majority of first-time buyers want to borrow more than 85%, which is the limit at which most lenders offer bad credit mortgages. Therefore, we often recommend improving your credit score before submitting a mortgage application, rather than trying to get on the property ladder with bad credit as this could give you access to more lenders and mortgage products.
It’s also a good idea – if it’s possible - to try and save towards a bigger deposit as this generally gives you access to better rates.
For some help improving a low credit score, see our blog post: What Credit Score Is Needed to Buy a House?
You can also find tips on how to save for a house deposit in our guide: House Mortgage Deposit.
Help to Buy
Most lenders who participate in the Help to Buy scheme don’t accept applications from people with bad credit histories. Therefore, you’ll likely find that your choice of lenders is restricted if you have poor credit and wish to use a help to buy scheme. One reason for this is that those who want to use help to buy are generally borrowing near the maximum – i.e. 90% - 95% - and adverse credit mortgages lenders don’t usually offer LTVs that high. You may want to try and save for a larger deposit while improving your credit rating so that you don’t have this issue.
How Can Bad Credit Impact Buying a House?
No Deposit and Bad Credit
Absolutely no lenders offer 100% mortgages – where you don’t need any deposit - so there definitely aren’t any that will offer a mortgage to an applicant with no deposit and bad credit. If anything, you’ll need a slightly larger deposit to compensate for your poor credit history.
Bad and Low Credit Score Lenders
There are lenders that offer mortgages to people with bad or low credit scores, but they usually charge more interest than for people with very good ones. This is because mortgages and loans for poor credit borrowers are riskier for lenders.
The Best Mortgage Deals with Bad Credit
Even in the limited lending space of bad credit mortgages, there are several lenders that have lots of different products to choose from.
You’ll probably need a broker if you want to buy a house or remortgage with bad credit, as many bad credit lenders don’t accept applications directly from borrowers. They require that you use a broker.
We’re experts in specialist cases and know the best mortgage lenders for people with bad credit, so send us an enquiry online or call us on 03304 332 927 today.