“Risky” mortgages – mortgages that are thought to be a higher risk to lenders due to the credit score or financial history of the applicant – are now becoming a little bit easier to obtain, thanks to smaller lenders and financial institutions offering mortgages to a wider range of applicants, taking into account their current circumstances without placing as much emphasis on what might have happened in the past, for example, a default on their account, a bankruptcy, a period of unemployment or an application that has already been rejected. You’ll typically have to pay more, either in the form of a deposit or in the amount of interest that has to be paid out, but the loan won’t have to be backed by government, which means that it should be easier to get approved.
Although many lenders recommend finding the house that you want to buy before you go ahead and apply for a mortgage, but if you know that you have poor credit or that you’re probably going to have to pay more than you’d like for a mortgage, it’s worth getting the bank to preapprove you so that you can look for a suitable house without getting your heart set on a property that you may not be able to get a mortgage for. See your bank and ask them if they would be willing to preapprove you – they will usually be your best bet, as they’ll be able to see exactly how much money you’ve spent, how much money you have coming in, and how much money you’ll have leftover at the end of each month and therefore whether or not you can afford the premiums. They’ll also be able to see, at a glance, how much money you’ll have leftover at the end of the month once the proposed mortgage has been paid. If your bank isn’t playing ball, see an independent mortgage broker or advisor – they’ll be able to scour the market and look for deals that aren’t normally available or that aren’t available to the public, as well as look into specialist deals for people with adverse credit. In the vast majority of cases, paying their fee could really be worth your while, especially if it secures your mortgage.
What You’ll Need
You’ll need a certain set of documents, regardless of whether or not you have good credit or bad credit, but in order to maximise your chances, its important to provide your bank or mortgage provider with as many documents as you can – the more proof you have of your income, outgoings and current credit status, the better. If you’re self-employed, you should have three years of accounts, three years of tax returns, three years of business bank accounts and personal bank accounts, net and gross income figures and, if your income has decreased or increased for any reason, an explanation of why. The same goes for if you’re employed: if there has been a gap in your employment, or your salary, or your salary has decreased, it’s important that you can explain why. This won’t necessarily impact too severely on your application, particularly if you ask your broker to focus on mortgage providers for those with poor credit. It’s better to provide an explanation of a gap in salary, a low credit score or a default on your credit report than to present your accounts with no information regarding why the figures aren’t what they should be. Things happen and circumstances change, particularly in the last six years – many people lost their jobs and their homes once the recession hit through absolutely no fault of their own, which is still impacting on their credit scores today. Explaining why you had a gap in employment or why you missed mortgage payments on your last house could well go a long way in securing the mortgage, as your broker or advisor will be able to explain those figures.
If you have a default or a court judgement, you’ll typically have more trouble obtaining credit in the six years following that default. Once six years are up, it’ll be cleared from your record, which makes getting a mortgage and other forms of credit much easier. However, this is easier said than done, especially if you’re looking to get a mortgage now – not in six years time. To help your case, contact the three credit reference ages and ask them to put a note next to the default or judgement to explain it. It’s also worth contacting the credit company that put the default on your file just to see if they’d be willing to erase it. You’d be surprised – many agencies are willing to erase defaults as an act of good faith, particularly if you can prove to them that the default is there through no fault of your own (for example, because notices were sent to an address that you were no longer living at, despite you notifying the bank that you’d moved). It’s always worth asking – after all, if you don’t ask, you don’t get.
Unfortunately, if your credit is poor and you’re deemed to be a “risk” to the lender, regardless of your current financial status, you’re going to have to pay for it in terms of the interest on the mortgage, or the amount of money you have to put down as a deposit. Typically, those with poor credit may have to put down a minimum of 35%, but it’s also likely that interest rates will be higher. In the case of high interest rates, you may be able to lock into a fixed rate mortgage for 2 years before switching to a tracker mortgage – by which time your credit should have improved which means that you should get accepted for a loan with a lower interest rate.