How to Get a Mortgage with Bad Credit

Getting a mortgage is a significant milestone for an aspiring homeowner, as it allows them to either take their first steps on the property ladder or upgrade their lifestyle by moving into a larger home. The question you may be asking yourself is, can I get a mortgage with bad credit? This guide is designed to help UK borrowers understand the impact of credit scores, offer strategies to improve credit, explore mortgage options for those with bad credit, and provide tips on strengthening mortgage applications. Overall, it provides a roadmap of getting a mortgage with bad credit.

Understanding credit scores and their impact

Let’s begin with your credit score, which has a significant impact on your eligibility to take out a mortgage.

What is a credit score?

A credit score is a numerical representation of your creditworthiness, based on your credit history. In the UK, credit scores are calculated by credit reference agencies such as Experian and ClearScore. Scores typically range from 300 to 999 or 1,000, with higher scores indicating a greater likelihood of you being offered credit by a lender. Find out more about how a credit check works.

How does bad credit affect mortgage applications?

Lenders use credit scores to assess the risk of lending to a borrower, so a low credit score can make it difficult to secure a mortgage. Bad credit can result from late payments, defaults, bankruptcies, or having little to no credit history. Borrowers with bad credit may face higher interest rates, more stringent eligibility criteria, or outright rejection. Make sure to also read our guide on how to get a car with bad credit.

Strategies to improve your credit score

Some people are high earners but still have bad credit, so the following tips are also for those who need to know how to get a mortgage with bad credit but a good income. Please note that these strategies may take a few months to have a significant effect, but they each have their benefits.

Review and correct errors on your credit report

Start by obtaining your credit report from the major credit reference agencies and reviewing it for errors. Mistakes such as incorrect personal information or erroneous accounts can negatively impact your score. Dispute any inaccuracies with the relevant agency to have them corrected.

Pay bills on time

Consistently paying bills on time is crucial for improving your credit score. Set up direct debits or reminders to ensure timely payments of utilities, credit cards, loans and subscriptions.

Reduce outstanding debt

High levels of outstanding debt can hurt your credit score. Focus on paying down existing debts, starting with those that have the highest interest rates. Avoid taking on new debt until your credit score improves. This guide on how applying for online loans may damage your credit score could also prove useful.

Keep credit utilisation low

Credit utilisation is the percentage of your available credit that you are using. You should aim to keep this below 30%. For example, if you have a credit limit of £10,000, try to use less than £3,000 of it.

Mortgage options for bad credit borrowers

Even people with bad credit may still have options available to them. Below are some of the most common examples for getting a mortgage with bad credit.

Government schemes

The UK government offers schemes to assist bad credit borrowers. The Right to Buy scheme enables eligible council tenants to buy their rented home at a discount. Another option is shared ownership, which allows buyers to purchase a share of a property and pay rent on the remaining share, making it more affordable to step onto the property ladder.

Specialist lenders

Several specialist lenders cater to bad credit borrowers. These lenders understand the challenges of poor credit history and usually offer more flexible criteria. However, interest rates may be higher compared to traditional lenders.

Guarantor mortgages

A guarantor mortgage involves a third party, usually a family member, guaranteeing the mortgage. The guarantor agrees to cover the mortgage payments if the borrower defaults. This arrangement reduces the risk for the lender and can help bad credit borrowers to secure a mortgage.

Strengthening your mortgage application

Below are a few ways to make your mortgage application stronger and more likely to be successful.

Larger down payment

A larger down payment reduces the loan-to-value (LTV) ratio, making you a less risky borrower. It also demonstrates financial discipline and commitment to the property purchase. Aim for at least a 20% down payment if possible.

Good debt-to-income ratio

Lenders assess your debt-to-income (DTI) ratio to determine your ability to manage monthly payments. A lower DTI ratio indicates that you have a manageable level of debt relative to your income. Aim to keep your DTI ratio below 35%.

Stable employment history

A stable employment history reassures lenders of your ability to make regular mortgage payments. Ideally, you should have at least two years of consistent employment in the same field. Provide documentation such as pay slips and employment contracts to support your application.

Finding the right lender

As with all big decisions, applying for a mortgage should never be rushed. Below are a few tips to help you find the right lender.

Research and compare lenders

Not all lenders have the same criteria for bad credit borrowers. Research and compare different lenders, including traditional banks, building societies and specialist lenders. Look for lenders who specifically offer products for bad credit borrowers.

Seek professional advice

Consider working with a mortgage broker who has experience with bad credit mortgages. Brokers have access to a wide range of lenders, and can help you find the best deal based on your circumstances and goals.

Read reviews and testimonials

By reading online reviews and testimonials from other borrowers, you can gauge the reputation and reliability of potential lenders. Personal experiences can provide valuable insights into the lender's customer service and flexibility.

So, can you get a mortgage with bad credit? The answer is that it can be challenging but not impossible. Understanding your credit score, taking steps to improve it, exploring various mortgage options and strengthening your application can significantly enhance your chances of success. By following these steps, you can navigate the mortgage process more confidently and move closer to achieving your dream of homeownership.

For more insights, dive into our blog and find out if you could go a whole year without buying anything new, as well as advice on how to get out of debt. We’ve also got a helpful guide on 5 questions to ask yourself before taking out a loan.

Representative Example

Based on the last working day of each month

Interest rate 288.35% pa (fixed) Representative 1,267.9% APR

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Warning: Late repayments can cause you serious money problems. For help, go to www.moneyhelper.org.uk.

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