BUYING a house is difficult enough at the best of times, but if you have a poor credit score, it could be even harder and more expensive.
Millions of Brits have been rushing to buy a home during the Covid crisis, and raced to beat the stamp duty holiday deadline last month.
But lenders became nervous dishing out loans over the crisis – some big banks even stopped lending to certain people, including those on furlough.
Those with poor credit scores could find it even more of a challenge to clinch a deal.
We explain how to get a mortgage even if you have a bad credit history – and how to boost your chances of getting an application accepted.
What is a credit score?
Your credit score shows how well you’ve managed your borrowings over the last six years, and lenders use it to calculate how risky it would be to give you money.
So it can help you – or hinder you – from getting a mortgage, loan and credit card.
Any county court judgements (CCJs) or bankruptcies will also damage your rating and remain on your credit report for six years.
Having a low score and lots of unpaid bills means you are in bad credit.
Can I get a mortgage if I’ve got a bad credit score?
If you have a poor credit score, you may find it more difficult to get a loan.
A lender will do a credit check when you make a mortgage application and any bad marks or a low score can make it harder to get the best home loans.
This is because you may be seen as a more risky borrower, so a lender could ask for a larger deposit than on a traditional mortgage.
Not having a credit history could also impact your chances of getting a mortgage too, First Mortgage compliance director David McGrail adds.
This is when you haven’t taken out any credit – like a credit card or a loan – at all.
“Having credit in place and repaying it can improve a credit score as it demonstrates an ability to keep up with repayment on credit taken,” he said.
“Having no track record of being able to repay credit is viewed as a step into the unknown meaning lenders can take a slight negative view on those taking credit for the first time.”
What lenders offer mortgages to people with poor credit scores?
While it might be tricky getting a mortgage lined up if you have a poor credit score, a number of banks have deals that are more suitable for these homebuyers.
For example, Metro Bank launched two new mortgage deals for buyers with bad credit histories in March.
The lender will give home loans to borrowers with an imperfect credit history as long as they put down at least a 20% deposit – it will even consider lending to those with County Court Judgements against their name.
The two and five-year fixed-rate deals are open to applicants who’ve defaulted on previous credit payments, such as missing a credit card payment, up to twice in the past two years.
Specialist lenders offer deals too.
Kensington Mortgages will consider offering loans to customers who are debt management plans and who have poor credit scores, with interest rates starting at 1.99%.
While Bluestone Mortgages will offer consider lending to those with CCJs too.
ClearScore chief executive Justin Basini said these so-called “bad credit” mortgages are usually only available through mortgage brokers.
“An experienced broker will know which lenders are likely to accept someone with particular circumstances,” he said.
“Speaking with friends or family who already have a mortgage broker or having a look on Google would be a good place to start your search.”
However you apply, the level of deposit is likely to be higher – at around 25% – and the interest rate will be more expensive than on a standard product.
It’s best to shop around for the best deal using a price comparison site such as Uswitch or ComparetheMarket.
What is a typical mortgage rate for bad credit?
Rates can change all the time and will depend on the lender and the economic environment.
Pricing will be higher than on a standard mortgage to reflect the added risk a lender is taking by giving a loan to a borrower with a poor financial track record.
Typical bad credit mortgage rates were at around 4% at the start of May 2021 based on a 25% deposit.
In contrast, the average rate for a standard two-year fix with a 25% deposit in March 2021 was 1.56%, according to the Bank of England.
How do I find a mortgage broker?
Most people get advice from a mortgage broker – and if you have a poor credit score, they could be handy helping you get a deal.
These are essentially a qualified middleman who has a duty of care to recommend a suitable mortgage for you.
If you do choose to use one, you may be able to get better deals than ones offered directly by the lender, and if your mortgage turned out to be unaffordable then you can complain and be compensated.
But their services do come at a cost and you’ll be required to pay a fee of around £500 according to Money Helper, and sometimes there’s the agent’s commission on top to think about too.
New rules came out in 2019 which means advisers have to explain to borrowers why cheaper deals haven’t been recommended.
This should help you understand why you’ve been offered a certain price – and it gives them a chance to challenge any recommendation.
Mortgage brokers must be regulated by the Financial Conduct Authority – you can check to see whether the one you’re planning on using is listed on the watchdog’s website.
How do I boost my credit score?
Improving your credit score will likely boost your chances of getting a mortgage.
Online Mortgage Advisor managing director Pete Mugleston said checking your credit score is the best first step to take.
You can check your rating for free by heading to Equifax, Experian or TransUnion.
“Reviewing your credit reports yourself so you can challenge any inaccuracies and have outdated information removed would be a good start,” he said.
While Ipswich Building Society’s Joanne Leek said you should check if information in your credit score is “linked” to another person.
For example, this could be through having had a joint card or bank account from a previous relationship, or from living in shared accommodation from their student days.
“Many are surprised to find they have an outstanding payment from a joint energy or phone bill for example, but this can impact their credit score to,” she said.
You can get on the electoral register, which proves who you are and where you live, which means its easier to get credit if you’re on the list.
You should also limit your number of credit applications, as lots of requests could be seen as a sign of financial distress to some lenders.
Pay your bills on time to boost your score, as any missed payments will be logged on your file.
Try and pay down any debt you have as this might put lenders off signing off your loan.