Buying a home is one of the most significant financial decisions you’ll ever make. But if you have bad credit, it can feel like an uphill battle. The good news is that having a poor credit score doesn’t mean you have to give up on your homeownership dreams.Â
With the right information and a bit of guidance, you can still secure a mortgage—even if your credit history is less than perfect. Let’s break down how bad credit mortgages work and what steps you can take to improve your chances of getting approved.
What is a Bad Credit Mortgage?
A bad credit mortgage is not a specific type of mortgage product but a term used to describe loans available to people with low credit scores. Also known as adverse credit mortgages or subprime mortgages, these loans often come with higher interest rates and may require larger deposits compared to standard mortgages. Lenders view borrowers with poor credit as a higher risk, which is why these terms tend to be less favorable.
However, bad credit mortgages are designed to help people who have experienced financial setbacks—such as missed payments, defaults, or even bankruptcy—get a foot on the property ladder. These products are offered by specialised lenders who understand that everyone’s financial journey is different.
Why Do I Have Bad Credit?
Before diving into how to get a bad credit mortgage, it’s essential to understand what constitutes bad credit. A low credit score can result from several factors, including:
- Missed payments on credit cards, loans, or utility bills
- Defaults or not paying back a loan as agreed
- County Court Judgments (CCJs) or legal rulings against unpaid debts
- Debt Management Plans (DMPs) or entering agreements to pay off debts over time
- Bankruptcy, which stays on your credit report for several years
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Even applying for credit too often can negatively impact your score. Every time a lender performs a credit check, it leaves a footprint on your credit history, and too many checks in a short period can make lenders cautious.
How Do Bad Credit Mortgages Work?
Bad credit mortgages operate similarly to standard mortgages, but there are key differences. Because of the increased risk lenders take by approving borrowers with low credit scores, they compensate by charging higher interest rates. Additionally, borrowers may be asked to provide a larger deposit, usually around 20-25% of the property value, compared to the 5-10% required for people with good credit.
This means that while you may have fewer options or higher costs in the beginning, having a bad credit mortgage is not a permanent situation. By consistently making payments on time, you can improve your credit score over time, and eventually, you may be eligible to remortgage with better terms.
Can I Get a Mortgage with Bad Credit?
Yes, it’s possible to get a mortgage even if you have bad credit. The process will be more challenging, but many lenders specialise in working with people in this situation. Here are a few things you can do to improve your chances:
- Check Your Credit Report: The first step is to understand where you stand. Get a copy of your credit report from agencies like Experian or Equifax. Look for any inaccuracies or mistakes, and get them corrected if necessary.
- Save a Larger Deposit: The more money you can put down, the less risk you pose to a lender. A larger deposit may help you secure a mortgage even with bad credit, and it can also lower the interest rates you’re offered.
- Show Financial Responsibility: Demonstrate to lenders that you’re financially responsible by keeping up with your regular payments—whether they are utility bills, rent, or loan payments. The more you can show that you’re managing your finances well, the better your chances of getting approved.
- Consider a Guarantor: Some lenders may allow you to apply for a mortgage with a guarantor, such as a parent or older relative. The guarantor agrees to cover your repayments if you can’t keep up with them, giving the lender additional security.
- Limit New Credit Applications: Applying for new credit can negatively impact your score. In the months leading up to your mortgage application, avoid taking on new debts and focus on maintaining your current financial commitments.
Remortgaging with Bad Credit: Is it Possible?
If you already have a mortgage and are looking to remortgage, bad credit doesn’t mean the door is closed. However, just like when applying for a new mortgage, lenders will assess your credit history, your current income, and your ability to meet monthly payments.
If you’ve consistently kept up with your mortgage repayments, this will work in your favor. Lenders will see that, despite your credit challenges, you have proven yourself to be a responsible borrower. Additionally, if you’ve paid off a good portion of your home, your loan-to-value ratio will be lower, which might help you secure more favorable terms.
Here’s what you can do if you’re thinking about remortgaging with bad credit:
- Keep up with Your Repayments: The most important factor in improving your chances of getting a good remortgage deal is a clean repayment history. Keep paying on time and in full.
- Build Equity in Your Home: The more equity you have (the portion of your home you’ve already paid off), the less risk you present to lenders. This can sometimes offset the impact of a bad credit score.
- Speak to a Specialist Broker: Some brokers specialise in finding remortgage deals for people with bad credit. They can access a wide range of lenders and may find more flexible options than you’d find by searching on your own.
Improving Your Credit Score Before Applying
While it’s possible to get a mortgage or remortgage with bad credit, improving your credit score can help you secure better terms. A higher score can mean lower interest rates, smaller deposits, and more mortgage options. Here are a few practical steps you can take to improve your credit score before you apply:
Pay Your Bills on Time: Even small bills like your phone or utility bills count toward your credit score. Paying everything on time shows lenders that you’re reliable.
Reduce Your Debt: If you have outstanding credit card balances or loans, try to pay them down as much as possible before applying. Reducing your credit utilisation (the amount of credit you’re using compared to your available credit) can positively impact your score.
Avoid New Credit Applications: Each time you apply for new credit, it triggers a hard inquiry on your credit report, which can lower your score slightly. In the months leading up to your mortgage application, avoid taking on any new credit unless absolutely necessary.
Check for Errors on Your Credit Report: Sometimes, credit reports contain mistakes. These errors could unfairly lower your credit score. Regularly review your credit report and dispute any inaccuracies to keep your score as high as possible.
Keep Old Accounts Open: If you have a credit card or loan that’s fully paid off, don’t close the account. Keeping old accounts open can help improve the length of your credit history, which is a positive factor in your score.
Finding the Right Bad Credit Mortgage
The key to finding the best mortgage when you have bad credit is working with the right lender. While some mainstream lenders may turn you down due to your credit history, there are specialised lenders who cater to people with less-than-perfect credit scores.
Here’s what to consider when looking for a bad credit mortgage:
Compare Lenders: Not all lenders offer the same terms for people with bad credit. Some may be more flexible than others. It’s worth comparing multiple lenders to see who can offer the best deal for your specific situation.
Look for Specialist Lenders: Some lenders focus on offering mortgages to people with poor credit histories. These lenders are more familiar with adverse credit situations and may be able to provide more tailored solutions.
Use a Mortgage Broker: A mortgage broker who specialises in bad credit can be an invaluable resource. They can help you navigate the complexities of the mortgage market and find the best deal for your circumstances. Brokers often have access to exclusive deals that you won’t find by searching on your own.
Don’t Let Bad Credit Stop You from Owning a Home
While bad credit can make getting a mortgage more difficult, it’s certainly not impossible. By taking proactive steps to improve your credit score, saving for a larger deposit, and working with specialised lenders, you can overcome the challenges and secure a mortgage that suits your needs.
If you’re ready to explore your mortgage options, consider reaching out to Mortgage Knight. They specialise in helping individuals with bad credit find the right mortgage solution, whether you’re buying a new home or remortgaging. With access to a wide network of lenders and tailored advice, they can guide you through the process and help you find the best deal possible.
Take the first step toward homeownership today and get in touch with a mortgage expert for personalised guidance.
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