Getting a mortgage, and that too with a poor credit history, may sound difficult, but it is not impossible anymore. Gone are the days when bad credit was the only sufficient factor to get your mortgage rejected.
These days, due to a liberal lending approach, new-age lenders provide loans with bad credit for a mortgage. Approval is offered as per your current repayment ability. They are ready to overlook your past financial or repayment issues. But it’s possible only if you are well-prepared with strong and provable creditworthiness. But for that, you need to find how to find the best bad credit mortgage lenders and also how to prepare your finances to apply when you find one.
What is the meaning of bad credit?
Bad credit or a low credit score is a financial situation resulting from delayed or missed payments, bankruptcy, defaults or CCJs. But it is not a permanent situation. If you improve your payment behaviour and start paying your debts and bills on time, you can improve your credit score and can show a positively changed payment record. This counts as an important factor when you apply for any loan, including a mortgage.
How to search for specialist bad credit mortgage lenders?
If you want to find suitable mortgage loan providers, take care of a few facts.
Search for the specialised bad credit lenders
You need to look for the lenders that specialise in bad credit mortgage products. These specialist poor credit lenders consider not only your credit score but your current income status, regular income and payment record.
Timely payment of debts and bills over the past six months can really convince them to approve your loan. But never rush to the first lender you find.
Always compare several lenders before you make your decision. Also read customer reviews posted on a lender’s website. It gives you an unbiased overview of how the mortgage provider deals with its customers.
Compare interest rates carefully
Considering the high risk profile due to bad credit, mortgages for people with poor credit have a higher interest rate.
Hence, it’s very important to compare the annual percentage rate to understand the actual total cost you will be paying if you choose a lender.
Do not focus on the advertised rate only. It can be different from what you get finally after the affordability assessment.
Also, check if the rate of interest is fixed or variable. Calculate the total repayment amount payable as per your financial condition before you accept a mortgage offer.
Choose repayment plans wisely
Lower monthly payments mean a longer repayment tenure. But this also means that you will end up paying a higher cost. When you pay small instalments for a long time, you also pay interest for the same duration.
Hence, you end up paying a higher amount. While in a short-term mortgage tenure, your monthly instalments can be high, but your loan tenure ends sooner. This means you do not pay a higher total cost.
Save a larger deposit
Due to a poor credit situation, you need to pay a bigger deposit. It helps you get mortgage approval faster. Also, it reduces the debt size. It means you will be paying smaller instalments.
Borrowing a smaller amount also gives you the liberty to bargain on the rate of interest. Hence, aim to save as much as possible for the deposit.
Usually, 10% of the total property value is paid upfront as a deposit. But in the case of poor credit applicants, this can be 15% to 20% of the total property value, considering your recent financial circumstances. The bigger your deposit, the higher your approval chances.
Improve your credit score before applying
It is true that bad credit mortgage options are available, but you still need to improve your credit score before applying. Use several ways for the purpose.
Pay all the debts and bills on time. Reduce pending debts by paying them off faster. These are the strongest factors. If your recent payment record is not good, approval is not possible.
No matter how regular your earning. If you are still not able to pay your essential bills and debt instalments on time, mortgage approval is not possible. For lenders, it is a clear risk of missed mortgage repayments.
Avoid taking new loans. Check your credit report and make sure it’s error-free. And get registered on the electoral roll.
Which mortgage lender is best for bad credit?
There can be no specific name of any lender if you want to lend or borrow with a poor credit situation. There are ways to decide whether a mortgage provider is suitable for you or not.
- A suitable lender can be found based on your credit history.
- The deposit amount affects your eligibility for a specific lender.
- Your income regularity and repayment ability affect the lenders you will get.
- Look for the mortgage companies that offer a transparent fee structure with flexible lending conditions.
- Compare seven lenders instead of accepting the mortgage offer from the first one.
- A mortgage broker can help you find a suitable lender as per your financial circumstances.
Who will lend when no one else will?
The lending market has become quite liberal now. Lenders do not follow the old school ways of affordability assessment.
- Specialist lenders – There are specialist bad credit mortgage lenders that work exclusively for mortgage applicants with a poor credit situation. They do accept the applications with CCJs, defaults, or missed payments.
- Mortgage scheme options – Family-assisted mortgage schemes can be of use to you. Explore the relevant options available in your region.
Can I get a 100% mortgage with bad credit?
Technically, getting a 100% mortgage with a poor credit situation is not possible.
You have to pay a certain percentage of the total property value as a down payment. Due to a poor credit situation, lenders have to follow a decided affordability assessment process.
Hence, practically, it is not possible even for a borrower with a good credit score to get a 100% mortgage. Most of the lenders prefer borrowers who are able to provide a certain amount of property value as a deposit.
It helps them understand the financial ability of the mortgage applicant to save and pay a certain amount upfront. This gives them the idea that if a bad credit borrower can save for a deposit, they can pay the mortgage instalments on time.
What are the bad credit second mortgage lenders?
These are the lenders that allow you to borrow against your property’s equity. It is a popular option for people with poor credit.
However, these loans are used for other purposes like debt consolidation or home improvement. That is why these are the short-term loans from mortgage lenders.
Hence, it’s important to understand the difference between a mortgage and a second mortgage. Before you apply to second mortgage lenders.
Make sure you understand the repayment obligations, compare the rate of interest, and check your affordability. Missing or delaying repayments can affect your credit score badly. Hence, borrow only when you actually need the funds.
How to boost your approval chances for a bad credit mortgage?
If you follow these simple yet effective steps below, you can considerably improve the approval chances of your mortgage.
- Maintain stable employment.
- Demonstrate income regularity.
- Reduce your debts by paying off the small ones faster.
- Reduce your discretionary monthly expenses.
- Pay your existing debts and bills on time.
- Manage your bank accounts properly.
- Demonstrate responsible financial behaviour.
The Final Thought
As you can read above, getting a mortgage with bad credit and finding lenders is not impossible. If you know the right process and the factors that prove your affordability, you can find the right lender.
Just make sure during the mortgage application, you provide all your details accurately. Mortgage providers fail to assess your repayment ability if they do not get the correct information during online verification. Be careful while applying. If you actually need the loan, make sure you apply responsibly.
FAQs
1. How long does it usually take to get a mortgage decision after applying?
It depends on the mortgage lender. But usually it takes from several days to several weeks.
2. Can self-employed applicants qualify for a bad credit mortgage?
Yes, if they can demonstrate a stable, regular and sufficient income, approval is possible. Providing supporting documents is required.
3. Does the age of the property affect mortgage approval?
Yes, the condition of the property affects the mortgage approval chances. The home you buy needs to be in good condition.