Having bad or poor credit doesn’t mean you will never be able to get a mortgage, but it can definitely affect the mortgage options available to you. This blog will explain how bad credit can impact your chances to secure a mortgage and what you can do to buy a house with a bad credit score.
Let us first explain how credit score works and what is the minimum credit score requirement to buy a house in the UK. This will give you an insight into how bad credit could affect your chances to secure a mortgage.
Credit Score Requirement For A Mortgage
How Credit Scores Work
Your credit score is based on your financial and borrowing history within the last 6 years. A credit score is categorised as excellent, very good, good, fair, poor, or very poor.
Factors that can adversely affect the credit score include:
● Not paying bills or paying them late
● Missing mortgage payments
● High levels of debt
● Frequently maxing out credit cards
● Not registering on the voters roll
● Receiving defaults or CCJs (county court judgement)
● Not building up a record of regular payments
● Entering into an IVA (Individual Voluntary Agreement) or declaring bankruptcy
Anything that happened over 6 years ago won’t appear on your current credit file or affect your credit score.
Credit Score Required to Get Mortgage in the UK
There’s no defined minimum credit score required for a mortgage. When a lender puts together your Decision in Principle (DIP), they collect information from credit reference agencies, review your payment history and study the answers you provide to the questions on your DIP. They then calculate their own credit score for your application.
The credit scores from credit reference agencies are useful indicators as to the current health of your credit profile. An excellent or a very good score from a credit reference agency increases the likelihood of a lender accepting your mortgage application. As the credit score slips down to good or fair, securing a good deal becomes harder.
Can You Buy A House With Bad Credit?
It is possible in the UK to buy a house with fair or even poor credit, but this will limit your choice of lenders. Also, the options will depend majorly on the nature of the bad credit and how recent it was.
To start with, you need to obtain a copy of your credit file from a credible credit reference agency. It will tell you what’s damaging your credit score, and you’ll be in a position to explore what options are available to improve your chances of getting a mortgage and buying a house.
Why Does a Bad Credit Score Matter to Lenders?
A mortgage is a regular commitment and an excellent or a very good credit history demonstrates your ability and willingness to meet regular commitments. While a poor credit rating depicts that you’re unable to keep on top of your finances and makes you a riskier borrower for lenders.
A credit score defines your Loan-to-Value (LTV) limit. Good credit history can offer you as high as 95% LTV for borrowers while a low credit score limits it to no more than 85% LTV. This makes it difficult, particularly for first time buyers who are mostly struggling to save a deposit. Interest rates on poor credit scores are also typically higher.
Either improve your credit score or save more for a deposit. You can find tips on how to save big for a mortgage deposit in our guide: Tips To Save For Deposit
No lenders give 100% mortgages, so there is no chance of getting a mortgage with no deposit and bad credit. But some lenders offer mortgages specifically to people with bad credit scores. They require larger deposits to compensate for poor credit history and charge more interest compared to people with very good or excellent scores.
Prysm Property’s Tenant-Buyer Scheme is designed to cater for all these issues that first time home buyers often face. It provides you with an opportunity to lock the deal and shift into your home even with a bad credit score and as low as a 3% deposit because it provides you ample time to improve your credit score before you actually apply for a mortgage. To learn more about our Tenant-Buyer Scheme please read our blog: All You Need To Know About Tenant-Buyer Scheme
