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A Guide to Bad Credit Mortgages

A credit score can be an important when it comes to making changes in your life, especially when it comes to mortgages. Times where we've felt the financial pinch and missed some payments as a result, could be enough to hinder us moving forward when buying a new home.

Although we are able to view our credit scores, we can't see the algorithms used that make up a lending decision, so it can sometimes be hard to pinpoint as to what is exactly causing our credit score to decrease.

Of course, people can feel there is a stigma associated with being refused credit from recognised lenders, but the truth is that the rules surrounding credit are very strict among a great number of lenders, so you're not the only one feeling the ramifications. It does of course pose the question as where those who have been refused should turn to next.

How Does Bad Credit Occur?

There is no denying how many people are struggling with debt on a daily basis. Whether it's due to mismanagement of money, or due to a particular set of circumstances, many can feel that bad credit is like an anchor around their neck, and stops them moving forward in relation to owning a home. While it can be disheartening when you're refused a mortgage from a high street lender, there could be a number of reasons as to why they've rejected your initial application.

If you apply via a bank, they may base some of their decisions on your banking activity. Believe it or not, if you receive anything like pay day loans or short-term loans, this can give a bank the impression you are not responsible with money, whether this is the case or not.

In other instances, some banks may refuse due to missed payments or defaults on your credit file. While there may be a perfectly reasonable explanation for this, many high street lenders will not be able to move forward, because of the credit score.

While this may seem unfair in the first instance, it is unfortunately a tried and tested method that ensures that they are able to borrow money responsibly. As such, you may need to source an alternative broker that is able to assess your current financial commitments, and see what kind of borrowing is available for your particular set of circumstances.

The following are examples of what can cause problems in relation to your credit file:

  • Missed credit card, loan or mortgage repayments.
  • If you are currently in a Debt Management Plan, have an IVA or have been declared bankrupt.
  • County Court Judgements will also affect as to whether a lender will provide finance or not.

Of course, it's not always the case that we've been irresponsible with credit, in some instances, we may have been living abroad, or merely self-sufficient, so therefore have never applied for credit. This, in some instances, can have the same effect as borrowing too much.

What Are Bad Credit Mortgages?

While it's easy to take umbrage at the name, bad credit mortgages are known by a number of different names, such as adverse credit mortgages and sub-prime mortgages. You may be wondering why such a finance option exists, especially given that finance can't be supplied by a high-street mortgage lender.

However, it's worth noting that one in four people are rejected a mortgage, as such, the market has recognised a solution needs to be in put in place to help such individuals onto the property ladder, and have introduced a number of methods that allow for this to happen.

What Are the Differences Between High Street and Bad Credit Mortgages?

Lenders who specialise in providing mortgage solutions to those with a poor credit score often check the financial background of applicants. While it's easy to assume that this is somewhat intrusive, it's worth noting that this has to be done, as your credit score cannot be used alone.

Not only does this allows a bad mortgage lender or broker make a more sensible decision when it comes to how much they are able to borrow you, it also allows you to ensure that you are able to meet the financial demands of a mortgage, and the possible consequences of not doing so.

It is also likely that you will pay more interest in relation to a bad credit mortgage, but this can differ dependant on the lender you decide to apply with. Generally, the guidelines for being considered for a mortgage by an adverse credit lender is that applicants are over 21 years of age, a resident in the United Kingdom, and in receipt of a regular income.

What Do I Need to Consider When Considering a Bad Credit Mortgage Broker?

Before applying with any credit broker, it can be advisable to get copies of your current credit score, so you at least now what financial defaults are listed on our credit report. There are three credit reference companies you can refer to, and their website links are as follows:

CallCredit

Equifax

Experian

Although there are online subscription options, each site will detail the process for a one-off report. Your credit score may be used as part of the broker's decision making process, along with a number of other factors. In this regard, it can be useful to have a clear understanding of your income and expenditure to give the brokers a fuller picture of your current financial standing as a whole.

This can be very beneficial in painting a more positive picture, as it shows brokers and potential lenders that despite some trouble in the past, you've been able to take control and steer your finances in the right direction.

Of course, many may already do this, and simply suffer as there is not enough income to pay all bills. As such, bills can often be delayed until the money is received, which can mean your credit file is affected in a negative way. Being aware of your current credit score not only means you can highlight defaults that shouldn't be listed, but it also allows you to consider your options more clearly.

Don't Commit If You're Unsure About the Broker

When you think of bad credit mortgages, it's easy to imagine that all lenders are simply looking to make a quick buck, and therefore charge you exuberant interest rates. While interest rates can be higher, this is because of the risk factor. There are some companies who may well try to take advantage, but for the most part, those who offer finance have to follow a stringent list of rules and regulations. So in this regard, there is very little benefit in a company taking advantage of your current situation.

It's also important that you are able to approach your broker with any questions or queries you may have. Buying a home can be stressful, so you need to ensure that you have everything covered so you can enjoy your home moving forwards.

A professional broker will be able to offer sound and robust advice as to what is available to you with your current financial standing, and how the repayments will work moving forward. They should also advise you of any financial penalties, and the worst-case scenario associated with missed payments.

Finding the Most Affordable Solution?

When applying for a bad credit mortgage, it can be easy to assume that you will have to settle for the first offer given. However, there are a number of different bad credit mortgage brokers available, so it really pays to make the comparisons before approaching a broker.

If you happen to come across a broker you like the look of, but you still have a few more questions, then don't be afraid to ask. It's easy to assume that the broker in question is doing you a massive favour in organising a mortgage, so you should accept the first offer. However, dealing with a bad credit mortgage broker really is a two-way street. They will be aiding you in securing a mortgage, while they will receive a commission for introducing you to the lender. In this regard, it's important that they are upfront about all the terms and conditions, and in a position to answer any questions you may have that will allow you to have a full understanding of how your particular mortgage will operate.

Is There a Way of Avoiding Penalties?

Paying off a bad credit mortgage early can mean that there that can be a penalty involved. This is due to the fluctuating interest rates, which means the costs incurred in relation to your mortgage can differ over time, with you normally paying less in the beginning. Again, such penalties can differ from broker to broker. Some may charge more, whereas others may not charge anything at all. In either event, it pays to ensure that you're fully aware of what the ramifications are should you look to pay off your mortgage sooner rather than later.

Are There Any Closing Costs to Consider?

A professional bad credit mortgage broker will be able to advise on the closing costs, but they generally cost around 2 to 3 percent of the mortgage total. The closing costs and the fees and costs associated with the sale and transfer of the property, and are normally charged at the time of the loan. Again, knowing what costs are likely to be incurred puts you in a better financial position when purchasing a property.

Will My Employment Affect a Decision?

Like any decision to lend money, a number of factors can be based on your income, regardless of how good your credit score is. For example, if you're self-employed, then you may find it harder to source a lender, but not necessarily impossible.

However, those looking at a bad credit mortgage should be completely upfront about their current source of income, so that the broker can ensure that they are considering lenders that provide mortgages based on your particular circumstances.

Things such as self-employment and temporary roles needs to be explored in more detail. For example, those who are self-employed will more than likely need to show proof of their income, which normally requires you or your accountant to provide tax returns that cover a two to three to three-year period.

A temporary role can be slightly more difficult to contend with, because by its very nature, it's not full-time employment. However, if you think things are going to change moving forwards you can advise a mortgage broker of this. Even if they're not able to help in the first instance, they may be able to give you some advice as to what steps you should take in order to place you in a better position for a bad credit mortgage.

Overall

Evidently, there is a lot to consider when it comes to applying, but once you understand how a bad credit mortgage works, you will be in a better position to make a well-informed decision. Each application is unique, as very few will have the very same set of circumstances. However, making a few considerations will ensure that you're left in the best position when it comes to selecting a broker or lender.

  • Check your credit report.
  • Work out your income and expenditure.
  • Be aware of any closing costs that may need to be paid.
  • Have a copy of your accounts prepared if you run a business or are self-employed, these should cover two to three years of trading.
  • Compare the different quotations, and select one that is best suited to your needs.
  • If there's anything you're unsure off in relation to your mortgage, ensure you ask the necessary questions.

Remember, bad credit mortgages may not be available to everyone, as it really does depend on their circumstances. While it's understandable that our dream house passing us by can be an upsetting experience, it's important that we look as to why it could have happened, and put the necessary changes in place where applicable. It's not a case of having a huge disposal income, but rather a case of you determining how you budget your money, and that you are in a position to make repayments comfortable each month.

Bad Credit Mortgages

A Happy Couple
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Borrow £25,000 to £500,000
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Property Purchase and Re-mortgages
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CCJ's, Defaults and Missed Payments
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Mortgage Arrears
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No Initial Credit Check
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REPRESENTATIVE EXAMPLE: On a repayment mortgage of £141,500 over a term of 360 months on an initial fixed rate of 5.39% for 24 months followed by an variable rate of 5.3% over 336 months the initial monthly payment would be £793.68 broker fee £1495, the total cost of the loan would be £285,019.64 and the APRC would be 5.6%. Rates as of 14/12/2016.

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