Can I Buy a House With Bad Credit?
- 13th August 2018
- Posted by: Loanable
- Category: Resources
There are many things that are innate in our nature, have a partner someone to share life with, for some, the desire to procreate and have a family, and in that mountain of all things human is the desire to have our own little piece of the earth, a home. A small parcel of land to call our own, or here in the UK as we say, “get on the property ladder”.
It is a dream many people have, to own their own homes, to say thanks and goodbye to Mr. or Mrs. Landlord and begin the climb on the first rung of the property ladder.
Buying a property and all that goes with it to many can seem daunting. There seems so much to know, understand, and digest and we don’t want to make any mistakes.
For many of us the largest purchase we will ever make in our lives is a property, and you want to get it right!
There are many guides available to read and review, and they can outline the steps to take, what you need to do, and how to do it, but the reality is, until you are really out there contract in hand purchasing a property, it is all on paper, in theory, the reality has yet to sink in.
And this is all on a good day.
Let’s throw a spanner in the works, and suppose you are not someone with perfect credit, or a high credit score, this can present in itself a new challenge, so how to overcome the hurdle of having bad credit in the past and buying a house, fulfilling the dream and natural instinct to stake out your little piece of our island?
Let’s look at this.
The Three (3) Factors in Buying a Property
To simplify the what can be a complicated process in buying a property, we will break it down into two (2) parts, and each part will have three (3) components.
There is the sale of a property:
* You find your dream home
* You submit a bid/offer/contract which is accepted
* You get a mortgage loan, and buy the house
Sounds simple enough, and the reality is, that it is that simple. The “Devil is in the detail”. Which as long as you remember and keep in mind these three things, find a home, submit an offer, get a mortgage, it keeps it easy and less stressful.
Next are the remaining three factors which are the most crucial as they make-up getting a mortgage. You can buy all the houses you want, submit all the offers you can, but if you cannot pay for them, then it all becomes a moot point.
So what are the three (3) factors involved in getting a mortgage:
Each of these is important as the other, and each can help in compensating for a weakness or shortfall in one of the other areas.
Affordability: Buying the right property/house, one that is well within what you can afford. Mortgage lenders use ratios in determining affordability, a ratio of mortgage payment to income, and a ratio of total debt to income.
Someone with an income of £1,800 a month and no debts, looking to buy a property with a mortgage payment of £500 a month, has a mortgage payment to income ratio of almost 28%, which is good.
If you take the same income and mortgage payment, add in £200 worth of debt, not monthly bills like gas, electricity, council tax, etc, but credit cards or loans, their total debt to income ratio is almost 39%, which still is not bad.
Mortgage lenders like lower ratios, it shows afford ability, and less likely to default on the mortgage.
Deposit: When applying for a mortgage, the first two questions will be what is the sale price of the property, and how much of a deposit do you have?
The deposit will determine the amount of the loan you require. The deposit creates a LTV or loan-to-value.
The larger the deposit you have, the less of a loan you will require.
If you want to buy a £150,000 property and have £10,000 as a deposit, you only need a mortgage of £140,000. However, there are some lenders that like to see a larger deposit of say 20%, which would mean a deposit of £30,000 on a £150,000 sale price.
Not everyone can save up such an amount, and there are mortgages available for lower deposits.
Just as I stated of these three components each can compensate for the other if one is weaker, a good credit score, and good affordability can help in having a lower deposit amount.
However, next is credit, what about having weak, bad or no credit?
Credit Score: In looking at these three (3) factors or components that are used to determine being approved for a mortgage, many people are under the assumption that if they have had bad credit in the past, they automatically will be rejected for a mortgage loan.
Not so, remember our over compensating rule of the other factors.
This is not to say that someone with outstanding CCJ’s/County Court Judgments, or recent open defaults and balances, or someone still under the restrictions of bankruptcy can get approved for a mortgage.
In all probability they cannot get approved for a mortgage, now, at this moment in time. They can in time, down the road, but first things first, get your financial house in order.
However, for someone with a low credit score, and past bad credit, there are ways to get approved for a mortgage, and the best way to do this is to follow a few steps, and also get pre-approved, get a mortgage in principle first, then go shopping for the abode of your dreams.
Your Credit and Getting a Mortgage
Let’s just break this down into a few steps as to what to do, and then we can discuss things in more detail:
* Get a copy of your credit history and know your credit score
* Correct any errors or omissions
* Increase your credit score
* Apply for a mortgage in principle
A credit score is a numerical value assigned to our credit histories based on these factors:
* Payment history
* How much we owe
* How long we have been credit active
* Types of credit accounts we have
* Do we apply for new credit (footprints, inquiries)
The higher our credit scores, the more likely we are to be approved for a loan. The lower our credit scores, the less likely we are to be approved.
However, sometimes people ave low credit scores due to bad credit in the past, defaults, missed payments, etc, and also just due to the fact they are not credit active.
Have you seen your credit history and know your credit score?
That is your first port of call.
It may not be as bad as you think, and it may be worse, so we begin the process…
* Clear any errors or omissions, if a CCJ has been paid, make sure it is reflected as such.
* Get on the electoral roll, this is how many lenders know you are real, and at the address you give.
* Speak to your landlord about using the Rental Exchange, get credit for paying your rent on time, or get a strong reference from your landlord.
Credit reports and credit reporting is changing. While payment history is still important, there are many other facets and factors being considered.
Let’s say your credit score is low, what can you do to improve your chances of buying a property and getting approved for a mortgage.
* Try to improve your credit score: Do what you can to improve it, there may be nothing you can do, your score is your score, and we will work from there.
* Affordability: Remember to consider properties within your means, keep your ratios low.
* Deposit: Can you save a larger deposit which reduces the lender’s risk on the loan. If you cannot save a larger deposit, then we look at Plan B.
Plan B: Can family aid you in increasing your deposit? This can be done by:
* Giving money: Giving you some money to put towards your deposit to increase the deposit amount.
* Gifted equity: Gifted equity can be in the form of selling you a property a family member owns that has equity in it. They sell it at a reduced price, gifting you the equity in the propery. You may still be required to have a deposit, but it may be a smaller one.
Gifted equity can also be in the form of pledging equity in a family member’s home to be a par of a deposit on your new home. A second charge against your family member’s property, as a deposit for your new new home.
* Guarantor: Having someone guarantee the mortgage for you, in essence stating they feel you will repay the loan, and if you default, they will then help you in paying the mortgage.
So to answer the question, can I buy a house with bad credit, the answer is yes, however, you need to do your research and homework first. And remember, time is a great healer. It may take time to gets your financial ducks in a row in order to be approved for a mortgage.