The mortgage market does not work like the small loans market. It is the biggest loan you have ever taken out, and hence it is not that easy to qualify for it. Cash loans are very small and designed to help you tide over during financial emergencies. Therefore, lenders do not bother about your poor credit score.
When you take out a mortgage, you are borrowing a very big amount of money, and therefore, it becomes more crucial to know that you have the potential to pay back the loan. This is why lenders will definitely want your credit score to be excellent.
However, a few lenders accept applications from people with poor credit rating, but it is not as easy as you think. A mortgage with bad credit does exist, but it may not be very convenient and favourable.
Applying for a mortgage with bad credit does not mean that the lender will not look into your credit file. They will run a credit check because they cannot sign off on your application if you have a credit score less than what they accept.
High street banks will decline you outright, which means you can only take a mortgage out with online lenders. However, you will have to arrange a deposit size between 20 and 25%. If you are looking to buy a mortgage with a bad credit score, you will need to follow the following steps.
With a blemished credit report, you will have to arrange a larger deposit size. There is still no guarantee that you will get it at affordable interest rates. This is why it is recommended to put in the application when such defaults are not recent.
Try to improve your credit score to get the mortgage at better interest rates. If you have a good credit file and a larger deposit size, it will help prevent you from paying too much interest. If it has been a long time to have damage, you still have a chance to get slightly better interest rates provided your financial situation has improved. Overall, it says that you should either improve your credit rating or your financial situation.
Take into account your partner’s debt
If you are planning to take out a joint mortgage with your partner, your lender will take a look at their credit report too. Even if your credit report is excellent, you will end up with an expensive deal if your spouse’s credit file is not good at all.
It is crucial to understand the fact that both of you have a good credit report if you want to get a mortgage at a competitive interest rate. However, if one of you has a blemished credit file, you can still get it, and it depends on the lender’s policy.
A rule of thumb says that you should do online research to estimate the cost of the debt. This can help you to get an insight into whether you can afford it or not. Note that the real cost will be much more than the estimation. If you suspect that it will put a burden on your repayment capacity, you should wait for some more time.
Have an explanation
If you are applying for a mortgage with bad credit, you must have an explanation for it. Lenders can call your creditworthiness into question, and they can raise questions about your repaying capacity. They will likely be interested in knowing the reasons for defaults.
Tell them the true reasons. They may ask you this question because they can consider your application and want to confirm if it was because of irresponsibility or there were unexpected reasons, for instance, being sick in the hospital.
Research the market
Whether you have a good credit score or a bad one, you need to research the market. This can help you understand how lenders are charging different interest rates. Further, you must know the processing fees and upfront fees. These fees vary from lender to lender. Researching the market beforehand can help you save a lot of money.
You can easily pick a lender that offers the mortgage at slightly better interest rates in case of a poor credit rating. If you cannot make a decision, you should use a mortgage broker. They have a large panel of online lenders providing financial products. They can assess your financial condition and give you a couple of options that suit you.
One of the advantages of consulting a broker is there are minimal chances of rejection. However, remember that you have to pay some broker fees, and it can be hefty. It can ease the burden of finding a mortgage lender, but you will have to research a reputed broker to save money in brokerage fees.
Although you can qualify for a mortgage with bad credit, you will end up paying high interest and large deposit size. A rule of thumb says that you should improve your credit rating before you put in the application for a mortgage. Try to improve your financial situation because this is also one factor that decides whether or not the lender will sign off on the application.
If you are planning to apply for a mortgage with significant other, make sure that you both have a good credit file. This can improve your chances of getting a mortgage at competitive interest rates.