Is getting a mortgage with bad credit history possible? We'll be honest: it's certainly not impossible, but it's not going to be easy to get one. While 'bad credit' can mean any number of things, and not every situation spells disaster for the would-be home owner, some bad credit histories are a harder sell to lenders than others.
For this reason, no advice on getting a mortgage with bad credit will be complete without advice on improving your credit rating. Particularly if your goal is finding the best mortgage deal, getting back on your feet financially is essential. Here's how to do it.
If you're confident that your credit problem is minor, you can jump straight down to the our online mortgage comparison tool to see how much you might be able to borrow.
Can I get a mortgage with bad credit?
The answer is: maybe, depending on your circumstances. We'll err on the side of caution here, because that's exactly what the mortgage lender will do. There is, of course, a world of difference between a single unpaid bill and a long history of missed credit card payments or bankruptcy.
Ultimately, only you know the extent of your financial problems: if they are medium to severe, and stretch over a considerable period of time, we wouldn't recommend applying for a mortgage just yet. The majority of brokers will almost certainly refuse to take your application to lenders.
As a product, the 'bad credit mortgage', or sub-prime mortgage, is now quite rare. They were partly responsible for the financial crisis of 2008, which prompted much tighter regulation of mortgage lending. There are, however, a couple of things you may be able to do to convince your lender that you should be given the chance to get a mortgage:
- Get a guarantor mortgage: Your lender may be more reassured to give you the mortgage if a family member agrees to act as a guarantor. Do bear in mind that this means linking your financial histories together, and they will become liable to repayments if you default;
- Present an impeccable financial record: your broker/lender will likely want to see a lot more financial information from you than usual, including detailed bank statements and payslips;
- Put together a bigger deposit: as a rule, this takes anyone further when they apply, but this is especially true if you need to compensate for a bad credit history. The bigger the deposit you can come up with, the better. See more detail on this below.
How much will I be able to borrow?
Almost certainly not as much as with a mortgage under regular circumstances. Be prepared to have a deposit of at least 25 to 30 per cent, rather than the standard five to 10 per cent. You will also need to be prepared for a higher interest rate. Often in such circumstances, a family gift of money towards your deposit can be really helpful, but it must not be a loan.
How can I improve my credit rating?
Basically, getting a mortgage with a bad credit history, if you can get one, is not going to be financially beneficial to you, so if you are able to delay buying a place for a few years until you've rebuilt your credit rating, we'd advise doing that.
Generally, your credit history for the past six years is what makes a difference on mortgage applications, so, depending on the severity of your past financial problems, you might find it better to save up and take the following steps to improve your credit:
- Pay all bills on time, or set up direct debits: if you tend to forget about bills, it's best not to leave any payments to chance;
- Get a credit card: this may seem counterintuitive, but if you've never had one, your credit score might be low for that reason. You need to prove to your lender that you can manage debt responsibly by making regular repayments;
- Check how your financial links with others are affecting you: sometimes, it's actually a spouse's debt that might be affecting your credit rating negatively; if you're in the process of divorcing, make sure the divorce is finalised and your financial links are severed before you apply for a mortgage. See more advice on mortgages and divorce in our guide.
- Reduce your credit spending: As a rule, try not to go over 30 per cent of the credit available to you, and never go over 50 per cent.
- Close any accounts you don't use: It's odd, but it can affect your credit score;
- Get on the electoral register: Another odd detail, but again, if you're not on the electoral register, your credit rating will be lower.
Once you've taken all of the above steps to improve your credit rating, you should be good to apply for a mortgage. We've partnered up with online mortgage specialists Habito (opens in new tab); use their online mortgage comparison tool below to see how much you could borrow. Then, speak to an advisor for free mortgage advice. Their expert brokers can also look over your documents, help you find the best deal and even assist with paperwork.