You may have come across the term subprime mortgage, but what exactly is it? A subprime mortgage is a loan offered by a lender that isn't your standard high street lender but typically an adverse credit or specialist lender. If you're considering a subprime mortgage, it's important to understand what this type of loan entails. In this guide, we discuss the definition of a subprime mortgage, the pros and cons and how to get one.
The Topics Covered in this Article Are Listed Below:
- What Is a Subprime Mortgage?
- What Are the Pros and Cons of Subprime Mortgages?
- When Should I Consider Applying for a Subprime Mortgage?
- What Can Affect My Eligibility for a Subprime Mortgage?
- Who Are Subprime Mortgage Lenders?
- Can I Secure a Subprime Mortgage?
- What to Consider Before Applying for a Subprime Mortgage?
- How Can I Increase My Chances of Securing a Subprime Mortgage?
- Can I Get a Subprime Mortgage for Commercial Premises?
- How Do I Apply for a Subprime Mortgage?
What Is a Subprime Mortgage?
A subprime mortgage is a loan that people with adverse credit get. This might include having CCJs (county court judgments), bad credit, defaults and a poor history of credit management. These sorts of mortgages usually come with higher interest rates than regular mortgages, often about 2% more than the average rates. Some subprime mortgage lenders also require at least 15% in deposit.
Subprime lenders assess applications individually by taking into account each person’s individual circumstances - including why they have adverse credit, how recent it is and what led to it. Their goal is to lend responsibly to ensure borrowers can pay back their loans while giving people the chance to access a mortgage when high street lenders won’t consider them.
What Are the Pros and Cons of Subprime Mortgages?
The main advantage of a subprime mortgage is that it can give people with adverse credit histories access to a mortgage, which they might not be able to do otherwise. This means they can purchase a home or an investment property and start building equity even if they've made some financial mistakes in the past.
However, it’s important to be aware of the potential drawbacks too. Subprime mortgages usually come with higher interest rates and smaller LTV/loan amount caps, meaning the borrower will have to make more sacrifices in terms of their monthly payments and possibly their lifestyle. The good news is that this can be reviewed in the future by remortgaging to a better rate once you have built up a better credit score.
When Should I Consider Applying for a Subprime Mortgage?
If you're looking to buy a new home but don't qualify for a conventional mortgage, subprime mortgages might be a solution for you. Although these loans come with higher interest rates than traditional mortgages from high street lenders or building societies, they can help satisfy the financial requirements of people who wouldn't otherwise be able to buy a home. Of course, no one should apply for a subprime loan without considering their finances and the potential consequences.
So, when should you think about applying for a subprime loan? Generally, it's best to consider this if you need more time to build up your credit score or if you've experienced financial problems in the past that have fundamentally changed your credit history. Subprime lenders learn about your credit history and income and don’t credit check in the traditional way when evaluating loan applications, so they can help borrowers with less impressive credit histories secure mortgages. Additionally, some subprime lenders will accept borrowers with no minimum credit score at all which makes them an attractive option for those with limited borrowing experience or without any sort of established credit history.
Ultimately, understanding the advantages and disadvantages of a subprime mortgage can help ensure that any decision further down the track is made with full knowledge.
What Can Affect My Eligibility for a Subprime Mortgage?
It's important to keep in mind that adverse events stay on your credit file for 6 years, although some lenders only look into the last 4 years. The degree of severity of your credit issues is also taken into consideration and affects the type of mortgage (conventional or subprime) and terms you can get. Here are the 3 levels of severity in credit issues.
Many people only have a few small discrepancies on their credit reports. It's easy to think that any and every little thing will hinder your mortgage application, but in reality minor issues within a credit history are quite common.
Small events can include:
- Bounced direct debits
- Missed payments (this includes bills, credit cards and loan payments)
- Late payments (on credit cards and loans)
You’re more likely to have access to high street lenders and better rates if your last minor event was more than a year ago. If it's been less than that, some high street lenders may still consider your application but may require a higher deposit. With most, though, 12 months is the cut-off period after which they'll be more likely to overlook this type of bad credit event.
At John Charcol, we specialise in helping people find the right lender for their specific situation. We know not all lenders have the same criteria and what might be acceptable to one could result in a poorer deal from another. Our experience means that we can help you select the provider best suited to your circumstances so that you get the best possible deal.
Medium Severity Events
These events are categorised as medium severity:
- Missed mortgage payments
- Defaults (settled or unsettled)
- CCJs (County Court Judgments)
When it comes to medium severity events, the age of the offence and how much it was for is taken into consideration when reviewing your application. The further in the past, the better. If any of the above bad credit events occur, you likely won't qualify for the best deals and may require a building society or subprime lender. For example, loans with only a 5% deposit (95% LTV) will probably not be an option and you should expect to have a 10% or greater deposit ready. There are still many mortgage products available to you, with a wide range of deals.
Major events have a considerable effect on a lender's decision. These include but are not limited to:
- IVAs (Individual Voluntary Arrangement)
Those who have gone through bankruptcy recently will undoubtedly have trouble being approved for a mortgage. If the event was more than 6 years ago then you will find that some high street lenders will still consider your application. If it was 3 - 6 years ago you’ll likely be limited to building societies and if it was within 3 years ago, there is a small handful of subprime lenders that don’t dictate that a number of years must have passed since the event.
In general, if you have a bad credit history and are struggling to secure a conventional mortgage from a high street lender or building society, then you may be able to get a subprime mortgage via a broker like John Charcol. However, it's important to remember that some lenders may not consider applicants with certain types of adverse credit. The best thing to do is to speak with a subprime mortgage specialist like John Charcol who can assess your individual circumstances and help you find the most suitable lender.
Who Are Subprime Mortgage Lenders?
Some subprime mortgage lenders include:
- The Mortgage Lender
- And more
In order to access a subprime mortgage lender you’ll likely need to use a mortgage broker that can act as an intermediary. That's where John Charcol comes in. We're a subprime mortgage broker that specialises in helping people with bad credit find the lender best suited to their needs. We know how different lenders view and assess applications, so you can be confident your application is sent to the right place. This means we can give you the best chance of being approved for a subprime mortgage and can also ensure you get the best terms and interest rates available for your situation.
Can I Secure a Subprime Mortgage?
Not only will lenders want to see that you can afford the loan, but they'll also want to make sure your adverse credit habits are behind you.
In addition to meeting a mortgage's usual requirements, here are some other factors they'll consider:
- How much deposit you have - a higher deposit can increase your chances of application approval. Subprime lenders may require deposits of 20% - 30% to reduce the risk of lending you money
- Your income - subprime lenders will typically require you to be in full-time, permanent employment or self-employed with a consistent income. This stability helps them assess whether you'll be able to meet your mortgage payments. If you've just started a new job, you may need wait before applying for a mortgage to build up your employment history.
- The story behind your credit score - not all bad credit is equal. Subprime lenders understand that sometimes there are extenuating circumstances behind your financial history, so they're willing to take more into consideration than just the points on your credit report. They will want to know the story behind any defaults and CCJs, so it's important to clearly explain your situation on the application
We understand that finding a mortgage with bad credit can be daunting, but John Charcol is here to help. Our expert advisers are on hand to guide you through the entire process from start to finish, from gathering documents, to submitting your application and making sure you get the best mortgage for your needs.
What to Consider Before Applying for a Subprime Mortgage
If you have bad credit, it's possible to get a mortgage, though there are factors to consider before applying:
- Think about how much you want to borrow and how much you can borrow - this is based on your income, requirements, deposit, credit history and more. Don’t necessarily feel like you should borrow the maximum amount if it means you’ll overcommit yourself with regards to your monthly payments – your broker can help you figure out what’s right for you
- Be prepared for higher interest rates - subprime mortgages typically come with higher interest rates than conventional mortgages, so be sure to budget for this. It's also important to remember that if your credit score improves over time, you may be able to remortgage and get a better rate
- Be aware of the repayment term - although longer term mortgages will typically have lower monthly repayments, it could mean that you'll end up paying more in interest over time. Consider whether opting for a shorter term loan would work better for your budget
- Think about how much deposit you can put down - a larger deposit will make you appear less risky to lenders and may give you access to better rates. It also means you’ll have a lower LTV and pay less interest overall
How Can I Increase My Chances of Securing a Subprime Mortgage?
There are a few steps you can take to improve your chances of getting a subprime mortgage:
- Improve your credit score - before applying, check that all the information on your credit report is accurate and up to date. Pay off outstanding debts as soon as possible, avoid further debt or defaults, make sure you're registered on the electoral roll and try to build a stronger credit score by using a credit card sensibly. The more evidence there is that you’re now successfully managing your finances, the better your application will look
- Save up a larger deposit - if you can, aim to save as large a deposit as possible. Not only will this help make your application look more attractive to lenders, but it could also help secure a better rate
- Find a specialist lender - there are lenders that specialise in subprime mortgages, so if your application gets rejected by one provider, don't give up. Seek advice from an independent broker like John Charcol, who can guide you to the most suitable lenders for your circumstances
- Be honest and open - subprime lenders will want to know the story behind any defaults or CCJs. It's important to be open and honest about these, as well as any other mitigating circumstances that may have reduced your credit score. Don't forget to mention any positive financial steps you've taken since then too
Can I Get a Subprime Mortgage for Commercial Premises?
Although it may be difficult, securing a commercial mortgage with bad credit is not out of the question. Your ability to secure one will depend on factors such as how much you wish to borrow, your past credit history and how large a down payment you can make. It's possible to obtain a mortgage for a business property even with bad credit, but your credit history will determine the subprime mortgage interest rates and repayment terms you're offered.
How Do I Apply for a Subprime Mortgage?
If you've explored your subprime mortgage options and believe you're eligible, the next step is to contact a specialist broker like John Charcol. We know the industry inside and out and can help you find the lender best suited to your needs. What’s more, most subprime lenders only work through intermediaries like John Charcol. So if you don’t use a broker, you’ll probably miss out on a lot of potentially better deals.
At John Charcol we look at your credit history, assess what kind of loan would work best for you and advise on the best lender to approach. Once we have the necessary documents, we'll fill in the application forms and make sure everything is correct before submitting them to the lender.
By engaging a specialist broker like John Charcol, you’re maximising your chances of being approved and getting a competitive rate. If you’re struggling to get a mortgage due to bad credit and need help finding the right lender, please contact us on 0330 433 2927. We’ll be happy to discuss your situation and provide guidance.
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