Which Types Of Bad Credit Affect Mortgage Deals The Most?

November 23, 2022

If your credit record is not ideal, then you may be put off from the idea of applying for a mortgage. However, the reality is that many lenders take a much more nuanced view of the situation that you might assume. The label ‘bad credit’ covers a variety of financial circumstances, some of which are considered less serious than others.

There is no avoiding the fact that lenders will conduct a credit check on all mortgage applicants. If they consider the applicant to represent too greater a risk of financial loss to them, they have a right to refuse to offer credit. However, some lenders have a more flexible attitude to risk than others.

The major credit reference agencies (CRAs) in the UK are Experian, Equifax, and TransUnion. They are legally allowed to collect data on your financial activity, including all loan applications, loan repayments, and utility bill payments. They then pass this data on to banks and financial institutions.

However, the CRAs are not allowed to collect data on your savings, earnings, benefits, or personal information such as your medical records or employment history. Furthermore, not all CRAs work out your credit score in the same way, so it is a myth that there is on single score. Your score may also change over time.

Many people have a less than perfect credit score because of change in life circumstances, such as redundancy, illness or injury which prevented them from working, divorce, or loss of a partner. If for whatever reason you do have an adverse credit score, the first step is to make a realistic assessment of your situation.

There’s no point trying to hide anything, as lenders conduct thorough searches, and will discover any anomalies sooner or later. Do whatever you can to minimise the damage and present yourself as a lower risk. This may mean not taking out any further loans, and setting up direct debits to make sure that you are meeting all your bills and repayments on time.

The further in the past your credit issues are, the less serious they usually are deemed to be. Many adverse events will be removed from your credit file completely after six years. If you can demonstrate that since the event occurred, you have shown a pattern of responsible financial activity, this will boost your prospects of securing a good mortgage deal.  

The least serious issues tend to be missed payments or defaults on bills or outstanding debts. However, this can depend on their amount and nature—a string of missed or late payments amounting to six months or more is far more serious than the occasional blip. Missed mortgage payments will be viewed as the most serious issue by many lenders.

More serious issues include an active Debt Management Plan (DMP) or Individual Voluntary Agreement (IVA), where you have an agreement with a lender to repay outstanding debts.

However, there may still be some IVA mortgage specialists who consider applicants with active IVAs or DMPS, if you can demonstrate that you are paying off the monthly charges on time and in full. The lender may charge higher than average interest rates, and ask for a higher deposit, so you may have to purchase a cheaper property than you intended.

The lender may also consider how much money is involved, and how many creditors. IVAs and DMPs which are fully paid out and over a year old are generally regarded less serious than active cases. They will also take into account whether you currently have a steady income source, and what your current outgoings are like.

County Court Judgements (CCJs) are the result of legal action taken against you because of failure to repay a debt. This will be recorded on your credit file for six years, but it is not an immediate barrier to gaining a mortgage deal. The lender will want to know how much money was involved, how long ago it occurred, and if the debt was discharged in full.

Bankruptcies are generally regarded as the most serious issue by mortgage lenders. However, it is not an automatic barrier to obtaining a mortgage deal, as many people might assume. It is true that almost all high street lenders will not consider an applicant with a bankruptcy on their credit file, and it may remain there even after six years.

However, if it has been at least 12 months since you were discharged from the bankruptcy, and you have a proven track record of good financial since, your mortgage prospects may be much improved.

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

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