Is your credit rating good enough for a mortgage?

After years of saving for a deposit, months of hunting for that dream home and countless hours spent comparing mortgage deals, there is still one major hurdle to get over in the quest for homeownership: a good credit history. Any would-be buyers who neglect this crucial aspect could be disappointed when they make their mortgage application.

Contrary to popular opinion, having a bad credit rating will not automatically prevent you from obtaining a mortgage. It will make getting a mortgage harder and could result in you being charged a higher interest rate than if you had a good credit history, but there are lenders out there who’ll consider you for a mortgage and a few ways you can improve your chances of being accepted before applying.

What is a bad credit rating and why is it important?

Your credit rating is based on your credit score and is a permanent record of how well you have handled credit in the past, as well as several other factors that we’ll cover later.

Basically, lenders use your credit history to determine how much of a risk you are in terms of borrowing. If you have previously had trouble making repayments on any form of credit or debt, this can result in a bad credit score. Examples of this include missing repayments on or failing to pay:

• Credit cards
• Personal or secured loans
• Mobile phone contacts
• Unauthorised overdrafts (or when requested for an approved overdraft)
• Hire purchase agreements
• Mortgages
• Household utility bills (electricity, water, gas, etc.)
• Council tax

In addition, things such as being declared bankrupt, entering into an individual voluntary arrangement (IVA), having county court judgements (CCJs) or other legal rulings for debt against you, or even being placed on a debt management plan, will all also have a negative effect.

Having a ‘bad’ credit history means lenders (including mortgage lenders) will consider you as being at higher risk of defaulting (i.e. missing repayments) and so may not lend to you.

What other factors are considered when I apply for a mortgage?

Different lenders have different criteria for lending. You may be more attractive to one lender and less attractive to another. However, there are a few common things that mortgage lenders will use to assess your suitability and to check the mortgage is affordable:

How much is the mortgage you want?

Smaller sums mean less risk. 

What kind of deposit can you put up?

Try to have a 5% deposit as an absolute minimum. Generally, the bigger your deposit, the better.

What are your employment details?

Your salary and how long you’ve worked for an employer will be critical factors. If you are self-employed then the lender will likely want to see your accounts – most lenders will accept two years’ worth of accounts, while some may want longer and others (albeit a minority) will accept less than two years. A mortgage broker can help to identify which lenders will find your circumstances acceptable. 

What kind of debts do you have?

Having some debt is fine and expected by lenders. However, they will want to check that you are managing with the debts you already have and that any previous bad credit is resolved.

What are your living costs?

Affordability checks are universal among lenders, so they’ll want to know what your current outgoings are. This will include things like current rent/mortgage, utility bills, grocery shopping and fuel costs among others. Affordability checks are there to ensure that you don’t take on more debt than you can comfortably handle, so be open and honest in your answers.

Other reasons why you might be considered a ‘bad’ mortgage risk

It might be surprising, but having no credit history can sometimes mean that lenders also consider you a higher risk. This might, at first, seem unfair – after all, doesn’t this mean you have a ‘clean’ credit history? Unfortunately, it also means that the lender has no way of knowing how good you are at repaying credit. However, don’t worry, this doesn’t mean the same as having a bad credit score or history.

How important is your credit score when getting a mortgage?

While income and affordability are also important when getting a mortgage, a lender may not be willing make you an offer if your credit score isn't up to scratch; Sarah Wilby, Mortgage and Protection Adviser and Later Life Specialist at our partner, Mortgage Advice Bureau, explains more in the video below:

Can I get a mortgage if I have a bad credit rating?

Yes, it is certainly possible to get a mortgage even if you have a bad credit rating. Some of the more well-known lenders may still consider your application and there are even providers who specialise in credit for people with a poor credit history. These are called bad credit mortgages. To find out more about bad credit mortgages, speak with our preferred mortgage broker.

What is a bad credit mortgage?

A bad credit mortgage is a mortgage is designed for people with a poor credit rating. Not only do these allow you to obtain finance for a home, but bad credit mortgages also help to repair your credit rating – but only if you keep to the regular repayments. Often, these mortgages will have higher rates of interest than if you had taken a mortgage with no prior poor credit history. Speak with our preferred mortgage broker. 

Should I speak to a mortgage broker?

Mortgage brokers remove a lot of the paperwork and hassle of getting a mortgage, as well as helping you access exclusive products and rates that aren’t available to the public. Mortgage brokers are regulated by the Financial Conduct Authority (FCA) and are required to pass specific qualifications before they can give you advice.

Speak to a mortgage broker today