If you’ve had credit problems in the past and you’d like to get a mortgage, you may think your chances are slim. But it could be possible so don’t give up before you’ve even tried. Here’s what you need to know…
You want a mortgage, but your credit rating has been negatively affected due to previous money problems. Bad credit can be caused by repossession, bankruptcy, debt management schemes, County Court Judgements (CCJs), defaults or missed or late payments. You may find it difficult to get a mortgage if any of these have applied to you, but it’s not necessarily impossible. It’s just a case of seeking the right advice and approaching the right lender. Some lenders won’t consider an application from someone with bad credit, while others will be more open-minded.
Why is this? Where lending criteria for a poor credit history is concerned, it’s important to make the distinction between high street lenders and specialist lenders.
Automated process
High street lenders follow an automated process. They receive such a high volume of applications and don’t have time to review them manually. They use automated systems that don’t look at the individual circumstances of their applicants. Your personal circumstances and why you ran into financial difficulty won’t be seen. An automated score is simply produced, or there are automated policy decisions.
Specialist lenders have more time to look at your individual circumstances, although a specialist lender may charge a higher interest rate if you are considered to be more of a risk.
Timing is key
Time is also an important factor. For example, when dealing with a repossession, most lenders will specify a certain timescale for when the repossession occurred. ‘High street lenders will typically need six years to have passed, although a lot of lenders will just say no,’ says MB Associates’ Sales Manager Phil Leivesley. ‘More specialist lenders might be willing to consider an application three years since the repossession. It all comes down to how the lenders look at the mortgage application as a whole.’
Many credit problems will clear from your records after six years. ‘If you view your credit file like a conveyor belt,’ says Phil. ‘After six years a lot of stuff falls off the end never to be seen again. That’s how it works with missed payments, defaults and CCJs – once six years pass they disappear off your file.’
That said, if you’ve had financial problems in the past, it’s important to be upfront about your history when you speak to a mortgage broker. Even if you had problems many years ago, it’s still important to divulge any past issues.
Information is vital
The more information a broker has at their fingertips, the more likely they can find the right solution for you. It could save a lot of time and last-minute worries. Phil says: ‘Lenders will often need a solicitor to carry out a bankruptcy check and if someone hasn’t told us about a previous bankruptcy then a solicitor can find it at the eleventh hour and the lender might say they are not prepared to lend, so always be upfront with significant previous mishaps.’
This doesn’t mean you can’t get a mortgage if you have been bankrupt in the past. ‘Some lenders will say once you’re clear for a set period of time – again usually six years, then you are OK to apply again,’ says Phil. ‘However, some lenders will not lend to someone who has been bankrupt in the past, irrespective of how much time has passed.’ This is why it’s important to find the right lender and seek expert advice.
Debt management scheme
A debt management plan is an arrangement you would enter into with a debt management company or charity, such as Stepchange, when you are unable to make payments. A debt management scheme operator will contact creditors on your behalf and arrange for you to pay off some of the debt over time.
Unfortunately, having a debt management plan on your file can have a serious impact on your ability to get a mortgage, as it demonstrates you’ve lost control of your finances in the past. However, there are specialist lenders, who may lend at a higher interest rate.
County Court Judgement (CCJ)
If you have been issued with a CCJ, provided you repay the debt within a month, you can get a certificate from the court to say it’s been paid. This means you won’t have to worry about it going onto your records as it will be removed from the public register and your credit file.
Otherwise it will remain on the register for six years. If you have cleared the debt, you can request a certificate of satisfaction, also known as a form N443. You can apply for one here. This won’t erase the CCJ from the register but will show that the debt has been repaid.
‘With a CCJ there are two things at play – the length of time since it was registered and the amount,’ says Phil. ‘If there has been a CCJ or a default registered within the last three years, most high street lenders are not going to lend. If it’s below a certain figure of, say £500, subject to your credit score some lenders will consider it.’
If your CCJ was paid off and occurred more than six years ago it will be removed from your file.
Defaults or missed payments
Other problems can include a default or late or missed payments. A credit commitment is typically marked as being in default once payments have been missed for between four to eight months. Consistent late or missed payments can show an inability to manage your money and can affect your chances of getting a mortgage.
Disputes with companies
One unfortunate situation that can affect your mortgage application is having a dispute with a company, traditionally telecommunications or utility companies. If you have been let down by a company or if you believe they are wrongly trying to overcharge you, this can backfire. You may be in the right, but it can still affect your mortgage application. Phil says: ‘Nine times out of ten we see a dispute where the person believes they are in the right, and it’s only natural that they don’t want to concede, as they might feel this admits culpability. However, often this person might wish that they have simply paid the creditor first and then resolved the issue afterwards. The worst thing is, if you don’t pay it and this is registered as a default, or you’re issued with a CCJ, then this will seriously impact your ability to get credit in the medium-term.’
Room for improvement
On a general note, try to improve your credit history if you’ve had problems in the past. If you can show three or four years down the line that you’ve maintained control of your finances it will benefit you. ‘Specialist lenders exist to lend in circumstances such as this and may be prepared to take a view on your application. It’s important to provide a narrative that explains why you ran into problems and how these have been resolved,’ says Phil. Remember that previous credit problems will disappear off your credit report entirely in six years’ time.
Meanwhile, before you apply for a mortgage, go online and check your credit report. Ensure you’re on the electoral register and your address is current if you’ve recently moved. Check your credit report regularly to ensure the information on it is still accurate.
Finally, if your credit report is fine but your partner’s isn’t so good, find out what to do if your partner has a poor credit history.
For further advice on getting a mortgage with poor credit, please contact us.