Can I get a first-time mortgage if I have bad credit?

The stress that is caused when you are under financial pressure can be overwhelming, and getting a foot on the property ladder can seem like an impossibility.  There is hope though, and a mortgage broker can help you see the light at the end of the tunnel.

As a mortgage adviser, one of the things I am most passionate about is helping people feel in control of their financial decisions.  It seems an appropriate time for me to talk about this because not only is it Financial Literacy Month this April, but it is also Mental Health Awareness week from the 16th May.

The links between debt and poor mental health are well documented.  Those in debt are twice as likely to experience mental health problems(1) and with the increasing cost of living, it is no surprise that 1.4 million more people are struggling to pay their bills(2) (an increase of 3%). Now nearly 20% of the population have a poor credit score.(3)

Bad credit has often been considered a barrier to getting onto the property ladder, but the reality is seldom this clear cut.  Having advised a lot of clients over the years, I wanted to delve into the topic in more detail because I see this question arising again and again.  So, if you have concerns about your ability to get a mortgage due to your financial history, I hope this blog can reduce some of the stress by offering knowledge and options to consider.  If you want to discuss anything in more detail, then please get in touch for a no obligation chat.

So, what exactly is bad credit?

If your credit score is classed as “poor” or “very poor” (we’ll talk about credit scores in a moment) then you would be considered to have bad credit.  It is a way that lenders classify how risky a borrower might be.  In other words, if you have bad credit, then you have a financial history that raises concerns.

There are several things that can contribute to a poor credit score – some more impactful and surprising than others:

• If you have filed for insolvency such as bankruptcy or Individual Voluntary arrangements (IVAs) – these are going to have the most detrimental effect on your credit score as they show a prolonged level of credit difficulty. A bankruptcy will stay on your credit record for a minimum or 6 years.  However, there are lenders that will still potentially consider giving you a mortgage in this time, depending on various circumstances.
• Having been ordered to pay money by a CCJ (County Court Judgement) – CCJs also have a big impact on your credit score and stay on your record for 6 years (unless you pay it off within a month or successfully overturn the judgement)
• A history of late or missed payments – if you have missed payments on loans, credit cards or even mobile phone bills, then this will slowly chip away at your credit score. Defaulted payments have a more detrimental effect than late payments.
• High levels of debt – Amassing large amounts of debt will also potentially be a concern.
• Making frequent applications for credit – even if you do manage your credit well, making consistent or recent applications can raise red flags, or constantly moving your debt from one 0% card to another and never actually paying it off can cause concerns.
• Being linked to other people with a poor credit history – even if you have always been meticulous with managing your own credit, if you are financially linked with someone who has bad credit, this could directly affect your own credit score.
• Having no credit history – this often surprises people, but unless you have a history of being able to manage credit, you may have a very low score. Even if you’re a brilliant saver and never spend beyond your means, your credit score will remain low.

Not all of these factors lead to “bad credit” they just might lead to you having a poor credit score due to lender concerns.  Bad credit generally refers to one of the first few issues which present the most challenges.  Having said that it depends on what you’re looking to borrow.   A mortgage broker will help you understand how big  your desired loan is compared to the value of your property, or how much you want to borrow versus your income.  All these things can have a significant impact on your options.

How do you know if you have bad credit?

You can find out whether you have bad credit by understanding your credit information.  A credit score gives an indication, but there is a lot more information in the full report than a score will ever tell you.  A lot of people think that your credit information can only be accessed by banks, but this couldn’t be further from the truth.  In fact, I always recommend that you get familiar with this information well in advance of when you want to get a mortgage or make any other significant financial decision.

There are 3 main providers when it comes to understanding your credit score – Experian, Equifax and TransUnion and I’ve put all of their details at the end of this blog post so you can take a look.  They all provide an indication of your credit health by using the criteria that we covered in the previous section.  The way they score however, is slightly different, which means you can’t compare them directly.

There are ways of accessing your credit information for free, and some providers charge.  It is good to keep an eye on it, as it can be an early indication of identity crime too.

What do I do if I have poor credit?

If you do find out that you have poor credit, then the most important thing is not to panic, but to be open to making changes as soon as possible. There are two reasons for this:

1. Your credit score is never set in stone, nor is it a black mark that remains on your record forever. It is entirely possible to improve your credit score, which we’ll get onto later.
2. Not all “poor or bad credit” is the same.  Lenders will consider more than just your credit score.  They will be considering the reasons for your poor credit history, the length of time that’s elapsed and what has happened since.  All of these factors will impact your options,

Speaking to a mortgage broker early can help you understand the impact of your score on your house buying plans.  We will review the options open to you  now, and review what might be an option in the future, so you can then take  the right course of action.

What is a bad-credit mortgage?

A specialised mortgage for those with bad credit works in a very similar way to a standard mortgage.  While they offer more options for getting on the property ladder, there are 4 potential disadvantages that you should be aware of:

• Invariably, lenders will charge higher interest rates and/or charge a borrowing fee.
• There is normally a requirement to put down a bigger deposit for a specialist lender. A common question that I’m asked is whether you can get a 100% mortgage with bad credit and the answer is almost always no, for this reason.
• The pre-approval process can understandably be more meticulous and take longer as a result. You might also be required to provide more evidence of your savings or ability to afford the mortgage payments.
• The amount that a lender will allow you to borrow may be lower.

The importance of seeking professional advice

It might seem counterintuitive to invest in a mortgage broker when you have bad credit, but often a broker can be the only way to navigate the complexities of the situation.  In these circumstances my job is rarely just to find a mortgage, but to help my clients improve their credit score, time their mortgage application appropriately, find the right lender and explain potential “catches” such as higher interest rates or deposit expectation.

How to get your finances in good shape before applying for your first mortgage?

At risk of sounding like Captain Hindsight, it does of course pay to keep your finances in a good shape if you’re planning to get on the property ladder in the next few years.  The better your credit score, the more eligible you will be for competitive rates.  Entering into a financial commitment like a mortgage is always better when you feel confident and empowered about your finances.

So, how do you avoid bad credit in the first place and look attractive to lenders.  I’ll do a more detailed blog on this later in the year but here are my top 5:

1. Keep an eye on your credit score – Have I laboured this point enough in this blog? This information is absolute gold dust and will make you aware of potential issues or anomalies before they become a problem.  Quickly addressing issues is the key to getting a hold on your finances.
2. Set up Direct Debits – one of the biggest issues I see is that people miss the minimum payment on their credit card (even if they pay it a few days later). To lenders you ‘missed a payment’ so if you set it up to pay at least the minimum amount and then ideally pay the rest of the outstanding amount all before it is due, then this will really help to avoid unnecessary missed payments on your file.
3. Spend within your means – This is sound financial advice at any time in life, but it is especially important to prove to lenders that you are able to live within your means – so avoid overdrafts or unpaid credit card debt, where you can. Also try to avoid spending to your limit all the time and ideally clear in full, each month, on time.
4. Cut any financial ties with ex partners or old flat mates to avoid their financial behaviour affecting your credit score. You might have set up a joint account with your flat mate years ago when you were a student, and forgotten to close the account, or maybe you’ve recently separated from your partner and still have a joint account with them.  While closing these accounts can feel hard at times, it will be the best thing for your personal credit score.  Also making sure you have moved all old accounts to your current address, and don’t have a range of ‘current’ addresses on your file.
5. Make sure you’ve registered to vote – this might seem like a strange one, but if lenders can’t place you at an address, they’re unlikely to be able to process your credit score. Not having this in place can be a frustrating reason to have no credit score and a totally avoidable reason to be rejected for a mortgage.

If bad credit is causing you stress – where can you turn?

If you have bad credit, please understand that you are not alone and that there are places of support that you can turn to for more advice.  If you’re not ready to speak to a mortgage broker just yet, but you would still like to speak with someone confidentially about your financial situation and how it is making you feel, then the government debt advice page has a list of places you can reach out to.

Resources to help understand your credit score.

Experian

Equifax

TransUnion

How to fix a bad credit score – https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/how-to-fix-a-bad-credit-score/

The important legal bits…

Please note for all mortgage products, terms and conditions apply. This information is a summary only. You will receive full documentation upon application which sets out the terms, conditions and limitations of lending provided.

4th April 2024 – The information contained within was correct at the time of publication but is subject to change.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Sources

1 Rogers C, Poll H and Isaksen M. The mental health premium. Citizens Advice. 2019; OECD.

2 Financial Conduct Authority – Financial Lives Survey – https://www.fca.org.uk/publications/financial-lives/financial-lives-january-2023-consumer-experience

3 Data from Equifax and summarised in https://www.finder.com/uk/credit-score/credit-score-statistics#:~:text=Credit%20score%20statistics,the%20excellent%20credit%20score%20band.