What is a bad credit mortgage?
Bad credit mortgages – also known as sub-prime mortgages or adverse credit mortgages – are specifically for people who have a bad credit rating. Trying to find a mortgage suitable for you when you have bad credit might not be easy.
You might have a few missed payments, had a CCJ (County Court Judgment) or may have even been made bankrupt. You might also be in, or have been in, a DMP (Debt Management Plan). These can all result in a bad credit score, limiting your finance options.
This type of mortgage works well for people who are trying to get on the property ladder but may have been refused a mortgage elsewhere because of their bad credit history. They are also suitable for homeowners or home movers whose financial situation has changed since taking out their previous mortgage.
These mortgages work in exactly the same way as a standard mortgage. The amount you borrow you will pay back to your lender in monthly instalments with interest added.
How are they different to other mortgages?
The main difference with this type of mortgage is that interest rates are higher in comparison to standard mortgages. It’s likely you will need to put down a larger deposit (typically between 15-30% of the total property value). The reason for these cost differences is due to bad credit customers being considered higher risk by lenders.
The good news is that paying a mortgage for a few years can improve your credit score. This can allow you to renew your mortgage with a standard lender at some point in the future.
How do I know if I have bad credit?
Many people don’t know what their credit score is or how it works. Your credit score is actually the most important information about you when applying for any type of finance. Numerous different factors can affect your credit score. Because of this, you shouldn’t assume that your credit score is in good shape because you haven’t been in debt.
Here we have put a guide together of some of the misconceptions around credit scores.
Checking your credit score is the best way of finding out what your financial situation looks like to lenders. There are a number of websites that you can use to get access to credit reports including Experian and Check My File.
Knowing your credit score will give you a good indication of what types of mortgages you can apply for, whether you have bad credit or not. If time allows you can also work to try to improve your credit score before you start applying for mortgages to help you get the best rate possible.
Applying for a mortgage with bad credit
Before applying for a mortgage it’s a good idea to compare different mortgage deals to find the most appropriate one for you.
When looking for a mortgage you should avoid making lots of applications at once with different providers. Each time you make an application it will leave a mark on your credit file that other lenders will see. Making multiple applications can look like you’re struggling to find a lender who will accept you. Multiple applications can potentially reduce your chances of approval at all.
How much can I borrow with bad credit?
If your mortgage application receives approval then the amount you could borrow is largely dependent on your individual circumstances. This involves looking at yours and your partner’s income and working out what you can afford in monthly payments.
You can use our mortgage calculator to get an understanding of how much you could borrow when taking out a mortgage.
Mortgage lenders also tend to take other considerations into account as well. This includes your monthly outgoings and other financial commitments before letting you know if you have been approved.