Tuesday, May 28, 2024

Is Buying a Home Out Of Reach When You Have Bad Credit?

Buying a house can be intimidating for anyone, but even more so if you’ve been struggling lately and your credit has been affected. Maybe you thought about homeownership but were assuming that it wouldn’t be a realistic option because of your financial situation. This might be true in some cases, but is buying a house always out of reach for people with bad credit?

Is it Possible to Get a Mortgage with Bad Credit?

The answer is yes. There are plenty of ways that you could get a mortgage, even if you missed payments before and your credit isn’t stellar. It’s all about knowing where to look and understanding how financing works. Let’s take a look at a few things you can do to qualify for a mortgage with bad credit.

Know What’s in Your Credit Report

The first thing you have to do is know what your credit score is in the first place. This will allow you to not only know what type of mortgage you could apply for but whether your credit is that bad to begin with.

Know that you are allowed to get one free copy per year of your credit report from the 3 major credit agencies: TransUnion, Equifax, and Experian. You will be able to see what’s on your report. You might be surprised that some things you were expecting to be there are not there anymore. That’s because most debt has a statute of limitation. Under British law, all outstanding unsecured debt has to be erased from the report after 6 years.

The next thing you have to do is check if there are any errors there. You could have an account that was settled but still showing. This can have a direct impact on your credit score. So, make sure that you dispute it. Agencies have a clear set of procedures that you can follow to settle a dispute and you will have to show copies of documents that are proving your claim.

Also, know that there isn’t one universal credit score across all agencies. Not only that, but scores can be conflicting. For instance, a score under 560 would be considered “very poor” with Experian but would be excellent with Equifax. In fact, some mortgage lenders don’t use credit scores at all and simply check your file for the presence of adverse credit without applying a numerical rating.

Do What You Can to Improve Your Credit Report

There are a few simple things that could allow you to instantly increase your credit score. One of the easiest would be to get on the electoral roll if you aren’t already. Another thing you can do is reduce your credit utilisation ratio. This is the ratio of debt vs available credit you have. There isn’t a hard number on what the best utilisation rate is, but most experts advise to keep it under the 30% mark.

Now, the best thing to do would be to start paying down your credit card with the highest limit first. Then you can start moving down. Credit utilisation is one of the biggest factors that will determine your credit score.

Next, you could start looking at alternative financial products, like secured credit cards, for instance. These can allow you to rebuild credit and usually have guaranteed approval. These will use an initial cash deposit as collateral for the card. It will also be the card’s credit limit. Use it responsibly and you will be able to improve your credit score if you had a few missed payments recently.

Know the Type of Mortgage You can Realistically Get

It’s also important that you know what you can realistically qualify for before you make your search. You already know that lenders will be more reluctant to offer a mortgage to someone with bad credit. That doesn’t mean that all of them will turn you down. What this often means is that the conditions will usually be different, and you’ll have a smaller pool of products to choose from.

Some may ask you to put a larger deposit down, for instance. This at least allows you to save up and maybe improve your credit at the same time so you can lower it. Others will limit how much you can borrow or will have higher fees.

Another option would be to work with firms that specialise in bad credit mortgages. These are often referred to as subprime mortgage lenders. If you want to know more about these and more tips on how to get a mortgage with bad credit, we suggest you check out onlinemortgageadvisor.co.uk. They run down everything you need to know from what credit issues will be accepted to how much money you may need to put down. They also explain some of the factors that could affect your chances of getting a mortgage with bad credit.

Mistakes You Need to Avoid When Looking for Bad Credit Mortgages

Just because you have bad credit and fewer options, it doesn’t mean you should despair. The first mistake to avoid is going for the first offer you get even if the rate is too high. It’s surprising to see how many people will spend weeks and weeks finding the perfect home but won’t put any effort into looking for the best rate and loan type.

The only way to know how good of a deal you can get is to shop around. Also, make sure that you look at lenders that will perform a soft enquiry on your credit report to see if you have a chance of getting approved first. That’s because multiple hard enquiries on your credit report can end up affecting you negatively. Also, know that companies expect you to do some shopping, so if you do all enquiries within a 30-day window, it will affect your credit score the same as if you went with only one lender whether it’s a hard check or not.

You also have to make sure that you are realistic with the type of home you’ll be looking for. Know that lenders are mandated by law to not lend money over a certain limit, depending on the income. This limit is usually 4.5 times your annual income. For instance, if you make £70,000 per year, you could get £315,000. We also suggest you speak to a broker for professional advice before picking an adjustable-rate mortgage since you may never know in which direction rates will go.

Another mistake you should avoid is systematically closing accounts. Closing some accounts may help you increase your credit score, but some might actually hurt you. For instance, it’s better to keep a credit card active if the balance is low. Closing the account will end up affecting your utilisation rate negatively. Paying loans before their term will not necessarily help you either. It could be a wiser decision to invest that money towards your deposit. This at least will directly improve your chances of getting approved by the lender of your choice instead of getting marks on your credit report.

As you can see, there are plenty of ways that you could qualify for a mortgage even if your credit is not as good as you’d wish. The goal is to look at as many options as you can, try to turn your situation around, and have realistic goals. You also need to have a basic understanding of how credit works so you can adjust your habits.

Claire James
Claire Jameshttp://www.firedigitaluk.com
Claire is an accounts manager at Fire Digital UK, an online publishing and content marketing company based in the North West.

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