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Adverse credit bad credit
Adverse credit bad credit
Bad credit can seriously hamper you in your hunt for a home loan. But with a
decent amount of deposit, deals can be found and you can start to put your past
behind you.
Nobody likes to be a goodie two shoes but if you have a less than squeaky clean
credit history you could well be refused a conventional
mortgage or
remortgage.
When you apply for a deal your lender will check your credit rating. If it gets
wind of any information indicating you may pose it a risk in terms of paying
back your home loan it may refuse to put you onto its books. Those turned down
lending are not all former bankrupts. You might be refused borrowing if you
can’t prove your income. Or you might be divorced or returned from living abroad
and simply have no credit history. You can pick up black marks against your name
for a host of reasons and it’s estimated that as many as one in four of us, or
five million households, have done. Just like banned drivers have not all
written off cars after drinking 12 pints but are occasional speeders, the most
common reasons for picking up points on your credit rating are failing to pay
utility, council tax, credit or store card bills on time.
These blunders could result in you picking up
County Court Judgements (CCJs)
and, true to the adage, creditors have better memories than borrowers. CCJs stay
on your record for six years. Many people are unaware that they have black marks
against their name, or adverse credit, until they apply for borrowing and their
record is checked. CCJs are often sent to a wrong address. Blemishes against
your name might also be genuine errors. There are plenty of examples of couples
being denied borrowing money because their 18-year-old daughter who lives at
their address has defaulted on her credit card payments. People have also been
blackballed because the previous owner of their property was a persistent
non-payer of bills. These instances highlight the usefulness of requesting your
credit file before you apply for a mortgage. This will put you on the front foot
should any nasty surprises be lurking there.
BLAMELESS
If you suspect you have a bad credit rating you are probably not a habitual over
spender but someone who has been a victim of circumstances beyond your control.
“The most common reasons are redundancy and relationships breaking down,” says
Rob Clifford from national broker MortgageForce. “These factors can suddenly
double someone's outgoings.” They are compounded, he says, by both the
proliferation of credit offers and the few numbers of current mortgage holders
who don’t take out insurance to cover their monthly
payments. If you are turned away by a bank or building society it’s not the end
of the world. You do have the option of applying for an adverse credit mortgage.
Many specialist lenders offer these deals, some of which are only available
through mortgage brokers and independent financial advisers. Many big lenders,
in fact, own specialist divisions that cater for adverse credit borrowers.
PREMIUM
The catch with these deals is that you’ll have to pay a premium for the luxury
of being allowed lending with a bad credit rating. It’s not a case of one size
fits all and prices vary according to the seriousness of your situation and the
level of risk you pose. If you’re a discharged bankrupt, for example, you might
need as much as a 35 per cent deposit to demonstrate your commitment. But
increased competition in the adverse sector has forced prices down in recent
years and you might find a deal that requires just a five per cent down payment,
which is on a par with the conventional market. Ray Boulger from Charcol says
there are some “reasonably respectable
products” out there but still some quite excessive ones. “The difference between
getting the right and wrong mortgage in terms of interest rates and tie-ins is
greater than if you were taking out a standard deal,” he says.
Typical adverse deals offer a one-year discount deal with an interest rate in
the region of around four per cent reverting to an interest rate of around seven
per cent. They will also have redemption penalties if you leave the deal within
the first three years.
It’s important you look out for redemption penalties, and particularly extended
ones, with an adverse credit deal as the average adverse credit customer has
their mortgage for three years. The idea is that after this period when you’ve
proved you can keep up with your monthly mortgage commitment, your credit rating
would have improved and you’ll be able to go back to the high street and switch
onto a better, more low-cost, deal. This is why you’ll hear adverse credit
mortgages being refereed to as credit repair deals.
OPTIONS
Having said all this, don’t assume you’ll need a specialist deal. More and more
people with past financial problems are finding that high street banks and
building societies are willing to take them onto to their books as standard
borrowers.
“It’s always worth checking with a traditional lender,” says Clifford. A bank or
building society will look at the details of your case such as the amount of the
debt and how quickly it was settled. They will also consider
your current income and saving record. If you are earning well and are proving
you can save money, for instance, the lender will view your case more favourably.
If you got into difficulties through no fault of your own the lender
will also be more likely to consider you. Providers are concerned with the risk
you pose them should they lend you a mortgage. The longer you’ve been back on
your feet, debt free and saving, then the better it will be for you. If a high
street does take you on board the obvious advantage is that, although you still
might find you’ll have to fork out a much larger deposit than others, you’ll be
able to choose from an entire range of competitive deals like every one else.
But you might decide on a different option altogether. Some question the wisdom
of allowing more money to people who are in trouble financially. Although you
won’t be allowed an adverse credit mortgage unless you’ve
addressed these problems ie. any debts you are still paying will be deducted
from the amount you can borrow and generally you have must have not defaulted on
any payments in the last six months to a year, critics argue they could still be
unaffordable. If you are stretching yourself with an adverse deal you could be
in danger of defaulting your payments or falling into arrears. This will
completely compound your bad credit history. A first time buyer, for example,
with a low income and poor financial history might be better off taking the time
to address their credit rating before entering the huge commitment that is a
mortgage. Knuckling down, saving money and paying off debts may be the
squeaky-clean way of doing things but it could be your ticket to a worry-free
mortgage.
What deals are out there?
43-year-old banker Andrew wants to remortgage £100,000 on his £170,000 property.
A few years ago he slipped a disc and could not return to his £35,000 job for
six months so went into arrears on his mortgage payments. He has since paid some
off but is still a month behind with his repayments. He has one CCJ of £1,200
for defaulting on a personal loan which is unsatisfied.
Based on the worse scenario, Andrew could consider a lender such as Mortgages
Plc. It has a one year deal at 4.75 per cent and will lend up to 70 per cent of
the property’s value, depending on income. Fees are pretty
reasonable too.
This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd
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