Bad credit is a blanket term, and if you are worried about your credit score, or your eligibility for a mortgage, it can be difficult to understand the options available to you.
In this detailed guide, Think Plutus explains all the nuances and variations in bad credit mortgages, how these apply to different bad credit scenarios, and the types of lenders most likely to approve your application.
The takeaway is that bad credit happens, and millions of people have adverse credit. Still, you can find a competitive mortgage offer with support from a whole-of-market, independent broker.
If you are worried about your credit and how this impacts your mortgage options, please contact Think Plutus to run through all the options and products we think are a great fit for your requirements.
How Do Mortgage Lenders Define Bad Credit?
Bad credit could be something as minor as a couple of late payments or as severe as having had a property repossessed – and the nature of your credit issues is a core factor in deciding how to move forward with a mortgage.
Mortgage lenders have their own policies and rules, but could define bad credit as:
- Having no credit history – this is common where people have never used credit lending or built up a repayment history.
- Low credit scores – a low score might indicate a lack of borrowing or be due to defaults, late payments or high borrowing levels.
- Adverse credit – varies from applicants with an old, expired CCJ to those with ongoing Debt Relief Orders or bankruptcy.
While high street lenders might reject any applicant without a pristine credit record, most specialist mortgage lenders assess each application on a case-by-case basis.
We will discuss variables shortly, but a lot also depends on the value associated with any defaults or late payments, how long ago they occurred, and whether you have since brought your finances back into good standing.
Finding a Mortgage with Bad Credit
You might find that some lenders are reluctant to lend to anybody with bad credit or set upper limits on the maximum they will offer or the minimum deposit they will accept.
However, securing a bad credit mortgage is possible, and we often recommend specialist bad credit mortgage lenders with expertise in lending in these circumstances.
Think Plutus works with a diverse client base, helping people find affordable mortgage lending in a range of scenarios:
- First-time buyers
- Remortgage applicants
- Business owners
- Professional buy-to-let landlords
Applying for the right mortgage can ensure you repair your credit record, have options to remortgage when previous debts have expired, or move ahead with a property purchase even before bad credit issues have been removed from your file.
Bad Credit Mortgages Explained
There is no specific ‘bad credit mortgage’ product. Rather, when we refer to bad credit mortgages, we mean mortgage offers or products suitable for applicants with adverse credit.
Many specialist lenders offer mortgages in tiers, with terms dependent on the type and value of your credit issues.
We may suggest a standard mortgage product that remains suited to you, or we might recommend a niche lender who can provide mortgage lending and manageable eligibility terms.
However, a bad credit mortgage is no different from any other mortgage – it is simply appropriate for applicants with adverse credit or a low credit score.
Differences Between Standard and Bad Credit Mortgages
Although the mortgage product itself is the same, the terms associated with a bad credit loan may vary.
Lenders generally consider a bad credit applicant a higher risk because there is a greater chance that you could fail to keep up with the repayments.
Most bad credit lenders charge higher interest rates. However, they can have more flexible eligibility criteria and may offer low early exit penalties if you find yourself in a position to remortgage at a cheaper rate.
Repaying a Bad Credit Mortgage
Repayments on bad credit mortgages work as standard – you usually need to make a repayment once per month of an agreed amount. The repayments include an element of interest and capital, so the total debt outstanding gradually drops.
Bad credit mortgages can come with fixed, variable, discounted or tracker interest rates, and are available depending on your preferences.
Fixed-rate mortgages tend to be more appealing since you have a static rate for a set period and will not see any changes to your monthly repayments.
The drawback is that if interest rates drop, you will be tied into a higher repayment and usually need to pay a penalty to refinance when you are in that fixed period.
Tracker mortgages track the Bank of England base rate and can go up or down. The risk is that if interest rates rise, your mortgage costs will also increase.
Most bad credit applicants choose a fixed-rate mortgage to ensure they know how much to budget each month. Making on-time repayments is essential to guarantee you do not exacerbate your credit issues or put your property ownership at risk.
Lenders require a higher deposit for bad credit mortgages, usually from 20% to 25%. However, some lenders will accept a lower down payment if you have built up a good history of responsible money management since your credit issues.
Choosing the Right Bad Credit Lender
We do not recommend using online mortgage calculators for anything other than a rough idea of what you might be able to borrow, and what it might cost per month.
That is because online mortgage tools are generic and cannot incorporate any information about your credit score or the types of credit issues you may have experienced.
A mortgage comparison calculator result is likely inaccurate and does not indicate that a lender will approve your application.
There are thousands of UK mortgage lenders, and although the bad credit market is smaller, it is impossible to know with certainty whether any eligible mortgage product you come across represents the best deal for you.
Think Plutus works with a wide network of approved lenders, many of whom do not lend directly to the public and only accept applications from a known broker.
The best way to select the most suitable lender for you is to contact our friendly team. We will review your circumstances, borrowing requirements and credit score and recommend the most suitable options.
Documentation to Apply for a Bad Credit Mortgage
Having all your paperwork ready can speed up the mortgage application process. Lenders may also regard an applicant favourably if they include a comprehensive package of documentation with their application and avoid the need to keep reverting with questions or evidence requests.
Lenders will typically ask for the following:
- Proof of income: payslips over the last three months, or business accounts or tax returns over the previous two or three years if you are self-employed. They may also request three months of bank statements.
- Tax documents: P60 or P45 if you have changed employers to show the total income earned over a tax year and tax deductions paid.
- Proof of ID: lenders ask for a passport, driving licence and utility bills or council tax statements to verify that your address is accurate.
Note that you would not normally be asked to provide information about your credit report but may wish to pre-empt queries by addressing this within your application.
Lenders will use one, or possibly more than one, of the big UK credit bureaus to access your credit report and evaluate how this impacts your eligibility.
Credit Checks for Bad Credit Mortgage Applications
Any bad credit mortgage lender will need to assess your circumstances, such as age, annual earnings, and the property you wish to buy.
They will also download your credit report, usually from TransUnion, Equifax or Experian.
Some lenders have a threshold credit score you need to hit, whereas others will look at the context and reasons for past credit issues before they make any decisions.
Credit reports include any issues, such as late payments, going back six years, although some lenders will disregard certain minor credit blips. They might only be interested in credit issues within the last two or three years.
You can read more about Mortgage Credit Scores in our previous guide, along with information about how these credit agencies differ and categorise your credit score.
Credit reports show a range of metrics, such as:
- All your existing debt and open credit accounts.
- How much credit you have available but have yet to use.
- Repayment history across open credit agreements.
- Reports of late payments or defaults on your account.
- Your credit score, as calculated by the respective bureau.
- Reports of bankruptcies, Debt Management Plans, Debt Relief Orders and IVAs.
- Any repossessions or CCJs recorded against your name.
- The date and value associated with any bad credit reports.
- Recent credit applications made.
If you apply for multiple bad credit mortgages simultaneously, this can count against you and will show on your credit report.
Likewise, if you are using over 50% of your available credit, it may be useful to start paying this down before you apply.
Mortgage Costs for Bad Credit Applicants
Any risk factors will mean a lender is likely to offer higher interest rates because they need to offset their exposure to be able to approve the loan.
Bad credit instances, such as loan late payments or frequent, heavy borrowing, suggest that there is a chance you may default on the mortgage.
However, a lender will not necessarily charge sky-high interest if you have made your repayments on time, repaid a debt management plan, or demonstrated good financial awareness.
Severe credit issues such as multiple bankruptcies, IVAs or CCJs will usually mean you have fewer lenders to choose between and pay a higher interest rate. Advice from an independent broker can be invaluable in helping you find the most competitive products.
Eligibility Checks on Bad Credit Mortgage Products
We recommend examining your credit report and understanding what it means before proceeding with a mortgage application.
Applying to a lender who will automatically reject your application can be disheartening and potentially impact your credit report further if you get as far as a hard credit search before being turned down.
Knowing whether you are eligible is important because it ensures you avoid paying unnecessary application fees.
If you need further advice about accessing your credit report or understanding how it affects your mortgage prospects, please get in touch at your convenience.
Borrowing Maximums on a Bad Credit Mortgage
The maximum you can borrow depends on your credit history, deposit, and other standard eligibility terms such as your income, age, debt, outgoings, and employment.
Although most mortgages are calculated as a multiple of your income, this is not always the case with bad credit mortgages.
Lenders must ensure they have confidence that you can afford to keep up with the mortgage repayments without impacting your ability to repay other debts or financial commitments. If the mortgage looks unaffordable, they will reject the application.
Borrowing multiples tend to be based on 3.5 to four or five times your income as an upper limit, but the multiple applied to a bad credit applicant is likely towards the lower end of the scale.
Specialist mortgage lenders calculate what they will offer on a case-by-case basis, so it is impossible to give a universal indication of how much you could borrow.
Improving the Chances of Mortgage Approval with Bad Credit
You can do several things to start improving your credit score or to present a better picture to a mortgage lender, positioning yourself as a responsible, reliable borrower.
- Registering on the electoral roll
- Closing unused credit accounts
- Querying any inaccurate reports on your credit file
- Paying bills on time
- Avoiding using your overdraft
- Managing your credit carefully
- Removing associations with ex-partners with adverse credit
You can also save a larger deposit or repay debt as much as possible to improve your debt-to-income ratio and apply for a lower Loan to Value ratio.
Deposit Requirements for Bad Credit Mortgages
Lenders have different eligibility rules, but a larger deposit can help improve your chances of being approved for a bad credit mortgage. Most lenders have minimum deposits as a percentage of the amount you wish to borrow, so anything above this is a positive.
Borrowers with adverse credit can potentially access large mortgages but will need a bigger deposit to qualify than somebody with a clean credit score.
Some specialist lenders will accept a smaller deposit but may ask for a co-signer to act as a guarantor or apply a higher interest rate.
The larger your deposit, the more lenders you may be able to apply to, and the smaller the overall loan. This option is preferable to ensure your monthly mortgage repayments are lower.
You may also be eligible for a government scheme such as Shared Ownership, offering you options to purchase a proportion of your property.
Example Bad Credit Deposit Minimums
Although lenders may have varying requirements, the below table gives you a good idea about the deposit you might need to secure your desired mortgage.
|5% Deposit||10% Deposit||15% Deposit||20% Deposit||25% Deposit|
Applying for a Bad Credit Mortgage Without a Deposit
Finding a mortgage with no deposit and adverse credit can be difficult because there is no 100% LTV mortgage product. However, you can look at alternative homeownership routes to get onto the property ladder.
The absolute minimum deposit normally required to secure a mortgage is 5%, but some of the options could include the following:
- Asking a guarantor, normally a parent, to co-sign your mortgage.
- Using a gifted deposit from a family member.
- Applying for Shared Ownership.
If you believe you can maintain mortgage repayments and want to explore these options, please contact Think Plutus for more information.
Bad Credit Mortgages by Buyer
Next, we will look at how bad credit mortgages work for first-time buyers, key workers, self-employed applicants and those over the general upper age limits.
Bad Credit Mortgages for First-Time Buyers
If you are buying a home for the first time and have a bad or low credit score, you may have fewer lenders to choose from, but you should still be able to get a mortgage.
Mainstream lenders avoid lending to anybody with bad credit due to the elevated risk, but specialist lenders can usually help.
The key is to ensure you speak with Think Plutus first and assess the nature and timing of your credit issues before you select a lender since these factors will dictate which mortgage providers are best placed to approve your application.
Bad Credit Mortgages Over 50
Age limits apply on most standard mortgage products, with age caps typically fixed at around 70 to 85 at the mortgage end date.
There are a couple of options here:
- Applying for a shorter mortgage term with higher repayments ensures you will be below the age cap at the end of the period.
- Using a specialist lender without an upper age limit.
Lenders will normally accept retirement income as a valid earnings source, and several will factor in part-time, full-time, self-employed, investment or pension income past 50 or even into retirement.
The more important element is that your income is secure and ongoing and will comfortably cover the mortgage costs as well as any other regular outgoings or debt repayments.
Bad Credit Mortgages for Self-Employed Applicants
Being self-employed makes your application riskier because a lender does not have a confirmed contract of employment to guarantee your income from month to month or year to year.
However, if you have a decent trading history and provide all the necessary paperwork to calculate your average annual income, you should be in a good position to secure a bad credit mortgage.
Some lenders are more likely to approve a self-employed bad credit mortgage application if they present verified trading accounts signed by a qualified accountant, so it could be worth paying a small fee for this service.
Bad Credit Mortgages for Key Workers
Key workers came to the fore during the pandemic when it became apparent how important they are to our society – and some lenders may offer favourable terms or more flexible eligibility criteria for public sector workers.
It is also a fact that some professions, such as dentistry or medicine, are less volatile.
Doctors, pharmacists and emergency services workers may find that they qualify for a slightly better interest rate on a bad credit mortgage because the chances of them losing their income are low.
Mortgage Schemes Open to Bad Credit Mortgage Applicants
We have mentioned briefly some of the mortgage support schemes that may be of interest and further options are as below. You are welcome to contact Think Plutus to discuss these initiatives or conduct your own research to see whether you are eligible.
The First Homes Programme offers first-time buyers discounts of between 30% and 50% on the cost of a new property.
Applicants must be able to secure a mortgage for at least half of the property price and have a household income of under £80,000 or £90,000 in London.
Right to Buy
Right to Buy allows tenants in social housing or council housing to buy their home below market rate, with a maximum discount of £82,800 or £110,500 in London.
Applicants may find it harder to get mortgage approval from a lender if they have bad credit issues, but a specialist lender may be able to offer a solution.
Expert Advice on Bad Credit Mortgages
Think Plutus is an independent, whole-of-market broker, representing you as a client in selecting suitable lenders, assessing your circumstances and suggesting products that will help you move forward.
We have a comprehensive knowledge of the bad credit lending sector and can discuss the pros and cons of competing products, lenders and rates to help you make informed decisions about the best options for you.
For more advice about bad credit mortgages or the lenders that suit your requirements, please contact Think Plutus.
Bad Credit Mortgage FAQs
In our below FAQs section, we have answered some of the most frequently asked questions about how bad credit mortgages work and who they are available to.
If you still have any remaining questions, please contact us through our enquiry form or give us a call to arrange a good time to talk.
What Happens if a Joint Applicant Has Adverse Credit?
Lenders must assess the credit reports of both applicants on a joint mortgage application, so even if one of you has a perfect credit rating, this will be a potential issue.
A specialist lender may be a better fit, or you may need to offer a higher deposit or accept a higher interest rate to offset the elevated risk of one partner having a bad credit rating.
Most lenders taper their criteria depending on how long ago the credit problems occurred. If your partner defaulted on a loan within the last 24 months, it is more likely to be a problem than if one late payment happened five years ago.
However, you may still be able to borrow more together than if you were to apply for a mortgage as a sole applicant – and lenders will need to know who else is living in the property regardless of whether they are a signatory to the mortgage.
Can I Qualify for a Mortgage with Bad Credit?
Depending on the circumstances and severity of the bad credit, you should be able to meet the eligibility criteria for a specialist bad credit mortgage – provided you have a sufficient deposit and can demonstrate good money management.
In some scenarios, you may need to wait until a minimum time has passed since your credit issues occurred since lenders will normally accept applications from 12, 24 or 36 months.
Can I Secure a Mortgage with Serious Credit Issues?
Again, it all depends on whether you have recent credit problems involving large debts or past credit issues that continue to affect your credit score.
- CCJs are reasonably serious credit issues, but you may qualify for a mortgage once your CCJ has been settled. Some lenders will approve an application provided your CCJ was more than two or three years ago and you have maintained repayments.
- An IVA is a formal debt resolution which allows you to repay debts gradually. If you have a good record of making those repayments, you should see your credit score begin to improve and may be eligible for a mortgage. You will, though, need approval from the insolvency practitioner before taking on further borrowing.
- Bankruptcy is one of the most severe credit problems, but you may be able to find a mortgage after several years if you have provisions in place to prevent this from recurring.
Are Bad Credit Mortgages Available with a 5% Deposit?
Lenders that offer bad credit mortgages usually need a higher deposit to reduce the associated risk, so it is less likely you will be able to move ahead with a minimum 5% down payment.
Saving a larger deposit, using a guarantor, paying off previous debts or waiting until your credit issues occurred at least a year ago should improve your prospects and the choice of lenders.
What Do Bad Credit Mortgage Brokers Do?
Think Plutus is an independent broker – we advise on bad credit mortgages as well as many other property financing types.
Our role is to help you find the right mortgage products and lenders for your needs and circumstances and ensure you understand the terms and are happy that you are making an informed decision.
One of the most important tasks is searching the market and recommending lenders who are prepared to consider your application – because most of these lenders do not trade directly, they are only available to applicants working with a regulated mortgage broker.