Having bad credit doesn’t automatically prevent you from getting a mortgage. Many potential homebuyers assume that a low credit score means homeownership is out of reach, but there are still options available. While poor credit can make securing a mortgage more challenging, there are lenders and mortgage products tailored to help those with adverse credit histories. By understanding the right steps and exploring alternative solutions, you can still achieve your homeownership goals.
This guide explores mortgage options for those with bad credit, including specialist lenders and high-street banks that cater to applicants with adverse credit. It also provides practical tips on improving your mortgage approval chances, from saving for a larger deposit to working with an experienced mortgage broker.
Understanding Bad Credit and Its Impact on Mortgages
Mortgage lenders assess applicants based on various factors, with credit scores being a key component. In the UK, three main credit reference agencies—Experian, Equifax, and TransUnion—use different scoring systems.
What Is Considered Bad Credit?
Bad credit typically results from missed or late payments, defaults, County Court Judgments (CCJs), or more serious financial issues like bankruptcy. Each credit reference agency has its own scale for assessing credit scores:
- Experian: A score below 721 is considered poor.
- Equifax: A score below 380 is poor.
- TransUnion: A score below 566 is problematic.
These scores impact a borrower’s ability to secure a mortgage, with lower scores often leading to higher interest rates or stricter lending conditions.
How Credit Scores Affect Mortgage Applications
Lenders do not have a universal minimum credit score requirement. Instead, they assess risk based on various factors, including:
- Payment history (e.g., missed or late payments)
- Credit utilisation (how much credit you use compared to your limit)
- Length of credit history
- Types of credit accounts held
- Recent credit applications
A strong credit score improves your chances of approval and can secure better mortgage terms, while a lower score may mean requiring a larger deposit or looking at specialist lenders.
Common Reasons for Bad Credit
Several factors contribute to a poor credit score, including:
- Missed or late payments
- High levels of existing debt
- Defaults, CCJs, or bankruptcy
- Frequent credit applications
- A short credit history
Bad credit marks remain on your credit file for six years, but some lenders may still consider your application depending on your financial situation and deposit size.
Exploring Mortgage Options for Bad Credit
While mainstream lenders may decline applications from those with bad credit, several specialist options exist in the UK.
Specialist Bad Credit Mortgages
Some lenders cater specifically to those with bad credit. These lenders consider the circumstances surrounding credit issues and assess applications on a case-by-case basis. Interest rates may be higher, and deposits of 15-25% are often required.
High Street Lenders With Flexible Criteria
Some high street banks and building societies offer mortgages to applicants with minor credit issues. They may accept:
- Defaults older than three years
- CCJs under a certain value
- Missed payments if they are not recent
These lenders typically require a higher deposit, often around 15% or more.
Guarantor Mortgages
A guarantor mortgage allows a family member or friend to act as security for your loan. If you fail to make repayments, the guarantor is responsible for covering the costs. This option can improve approval chances but carries risks for the guarantor.
Joint Mortgages
Applying for a mortgage with a partner or family member who has a strong credit history can improve approval chances. However, some lenders consider the lowest credit score between applicants, so it’s essential to choose the right lender.
Improving Your Chances of Mortgage Approval
While securing a mortgage with bad credit is possible, taking the following steps can improve your chances:
Saving for a Larger Deposit
A bigger deposit reduces lender risk and increases approval chances. Many bad credit mortgage lenders require deposits of 15-25%.
Working With a Specialist Mortgage Broker
A mortgage broker with experience in bad credit mortgages can identify suitable lenders and improve your chances of securing a loan.
Checking and Improving Your Credit Report
Regularly reviewing your credit report helps identify errors and areas for improvement. You can request free credit reports from Experian, Equifax, and TransUnion.
At EBR Mortgages, we’ve partnered with checkmyfile to offer a comprehensive credit report that pulls data from the three main UK credit agencies—Experian, Equifax, and TransUnion—all in one place. Try it free for 30 days, then £14.99 a month, with the option to cancel anytime.
Click here to start your free trial.
Please note: EBR Mortgages Limited and Stonebridge Mortgage Solutions Ltd are not responsible for the accuracy of checkmyfile’s information. It’s your responsibility to cancel any subscriptions. This arrangement is non-compulsory, and other credit checking providers are available.
Avoiding New Credit Applications
Multiple credit applications within a short period can negatively impact your score. It’s best to minimise new credit applications before applying for a mortgage.
Reducing Credit Utilisation
Keeping credit card balances low and paying off existing debt can improve your credit score over time.
Steps to Rebuild Your Credit Before Applying
Rebuilding credit before applying for a mortgage takes time but can improve your chances of approval and secure better terms.
Checking Your Credit Report for Errors
Mistakes on your credit report can impact your score. If you find errors, contact the credit reference agency to dispute them.
Paying Bills on Time
Timely payments are essential for building a strong credit history. Setting up direct debits ensures bills are paid on time.
Reducing Credit Utilisation
Using less than 25% of your available credit limit can positively impact your score.
Avoiding New Credit Applications
Limit new credit applications in the months leading up to your mortgage application to avoid unnecessary hard searches on your credit file.
Conclusion
Bad credit doesn’t mean homeownership is out of reach. While you may face challenges, there are specialist lenders and mortgage products available. By improving your credit score, saving for a larger deposit, and seeking expert advice, you can increase your chances of securing a mortgage.
Working with a mortgage broker who understands bad credit applications can be invaluable. They can help identify suitable lenders and navigate the mortgage process, ensuring you get the best possible deal.
FAQs
Can I get a mortgage with bad credit? Yes, but you may need a larger deposit and may pay higher interest rates. Specialist lenders can assist with bad credit applications.
What is the minimum credit score needed for a mortgage? There is no universal minimum, but mainstream lenders typically require a fair or good credit score. Specialist lenders consider applications with lower scores on a case-by-case basis.
How much deposit do I need for a bad credit mortgage? Deposits of 15-25% are often required for bad credit mortgages, though this depends on the lender and severity of credit issues.
How can I improve my credit score before applying for a mortgage? Paying bills on time, reducing credit utilisation, checking your credit report for errors, and avoiding multiple credit applications can help improve your score.
