Before we get into the complicated world of lenders, poor credit mortgages, and remortgages, let’s first discuss how credit works. This will help you understand how bad credit can affect your ability to get a mortgage.
How much credit do you need for a mortgage?
How credit scores work
Your credit score is a three-digit number that is calculated based on how much you borrowed and your financial habits over the past six years. This number is provided by credit reference agencies and can be classified as poor, fair or good, very good, very good, excellent, or very bad.
These are some of the things that could lead to a poor credit score.
- Mortgage payments not received
- Late or no payment of bills
- High levels of debt, excluding student loans
- Credit cards regularly maxed out
- Registering on the voters’ roll is not an option
- A poor credit or payment history, i.e. Not having a track record of punctual, regular payments
- Receiving CCJs or defaults
- Declaring bankruptcy and entering into an IVA (“Individual Voluntary Agreement”)
All of these apply to the past 6 years. After 6 years, all payment history (including CCJs or defaults) will automatically “drop out” from your credit file. Even if you have missed a mortgage payment more than 6 years ago, this won’t affect credit scores or show up on your credit file.
What credit score do you need to buy a house in the UK with a mortgage?
A mortgage doesn’t have a set credit score. Lenders use information from credit reference agencies about your credit history and payment history but don’t rely solely on these scores.
Your lender will compile your DIP (Decision in Principle) from information obtained from credit reference agencies. They will also review your payment history and examine the answers to the DIP questions. The lender will then create a credit score for you.
Credit scores from credit agencies are not able to influence your mortgage application but they can provide useful information about your credit score. Credit reference agencies that have a very high or excellent rating indicate that there is a greater likelihood that a lender will approve your mortgage application. This means that you will be eligible for better deals. A fair or excellent credit score will make it more difficult to secure a great deal.
What is the impact of poor credit on mortgage lenders?
Excellent credit history or very good credit is a sign of your ability to pay regular mortgage payments. Poor credit ratings can make it more difficult to obtain a mortgage because they could indicate that you are unable to manage your finances.
Remortgaging and Mortgages
A person with poor credit is more likely to have a lower maximum LTV (loan to value) than someone with very good credit.
For the same reason, interest rates for remortgages and mortgages with adverse credit are often higher than standard products.
It can be difficult to find a mortgage for someone with poor credit. Most first-time buyers desire to borrow more than 85 percent. This is the maximum limit that most lenders will offer bad credit mortgage. This will allow you to access more lenders and mortgage products.
Bad credit – the best mortgage deals
Many lenders offer a wide range of products, even in the small lending space for bad credit mortgages.
A broker is required if you are looking to purchase a home or remortgage your bad credit history. Many lenders won’t accept applications from borrowers.