Getting a mortgage when you have a bad credit rating

So you've visited all the high street banks and are struggling to get a mortgage because of a pesky missed bill deep in your credit history. While a single late card payment may not seem like a big deal, it could be the difference between successfully obtaining a mortgage for a new home and being stuck in your parents' spare room. This is because all major lenders in the UK use a process called 'credit scoring' to determine which customers they want to lend to. This process involves examining someone's financial history to look for signs that they may not be able to repay their mortgage.

Having examples of 'bad credit' in your past is likely to end your hopes of getting a mortgage on the high street. It has become more difficult for those with a patchy credit history to obtain a mortgage since the financial crisis as the biggest lenders sought to reduce their exposure to the property market and lend to just the safest customers. The mortgage market has improved enormously in terms of the rates and breadth of products available. Lending volumes have increased as borrowers are drawn to some of the record low deals on offer but lending criteria shows no signs of relaxing and lenders are still only eager to attract customers with impeccable credit records.

Not all lenders will necessarily give you the cold shoulder

While major banks are likely to remain closed to credit inpaired borrowers for a long time to come, there are still some mortgage options for people with bad credit. By doing enough research and speaking to the right people, a mortgage can still be yours. There is a common misconception that poor credit history equals no access to a mortgage. In fact, even with bad credit behind you, you may still be able to find a good deal. The only issue is that you will need to a decent deposit already in place and you are likely to be hit with a higher level of interest than someone with a good credit score.

Specialist lenders

People with a bad credit history will likely have to look beyond major brands when trying to obtain a mortgage. While high street lenders traditionally take a black or white approach to credit ratings, some specialist lenders take less of a cavalier approach. Many of the regional building societies are often better attuned to assess suitability and affordability based on a complete client assesssment rather than the credit scores favoured by mainstream lenders. Although the sub-prime mortgage market shrank dramatically following the credit crunch, there are some small specialist lenders such as Precise, GE Money and Kensington who will consider clients with county court judgments (CCJs), previous mortgage arrears and even bankruptcy against their name if a sufficient period of time has passed. Many operate exclusively through mortgage advisers and charge higher rates, but a successful term with one of these lenders makes it more likely that you will be able to return to a high street mortgage lender in future.

Expert advice

A mortgage broker will have access to a wide range of lenders which specialise in these types of mortgage and should be your first port of call for further information. The good news is that in recent months there have been one or two new lenders who have entered the market who specialise in bad credit mortgages. You would be well advised to speak to a good financial adviser who will be able to suggest the right one for you.

Checking your credit record

Checking a credit record is a relatively simple process and websites such as Equifax and Experian allow access to this data for a small fee. It is useful for all borrowers to check their reports, regardless of whether they have had credit problems in the past. All potential borrowers should check their own credit rating online. This allows them to assess their current score and take measures to improve their rating.

What improves a credit score?

Mortgage lenders are eager to see that borrowers are able to meet their monthly outgoings comfortably each month, first-time buyers will likely require a strong rental history with all payments being made on time. It is also vital to check that information such as address and telephone numbers are correctly listed and that you are registered on the electoral roll at your current property. But prospective buyers should make sure they don't perform too many credit checks or apply for too much new credit in a short space of time, especially before a mortgage application, as lenders will view such actions suspiciously.

Some people help prove their creditworthiness by taking out credit cards. While spending on plastic is often perceived as undesirable, borrowing responsibly and clearing the balance each month makes lenders perceive a customer as trustworthy. However, obtaining money from a payday lender will seriously damage someone's chances of getting a mortgage, regardless of whether the debt was paid on time or not.

If you have suffered a declined application or are concerned about potential black marks on your credit file, it is easy to check online with the credit reference agencies what exactly is showing at little or no cost. That will help you establish whether there is something on your file that shouldn't be there or the extent of any particular blip. If you have encountered a problem then rectifying any missed payment and getting back on track as soon as possible will improve your chances in the future, especially if it's a minor problem.