How To Get a Mortgage With Bad Credit but Good Income
Owning a home is a dream for many individuals and families in the UK. Not only does it provide a place to live, but it also makes an excellent investment in a person’s future.
Yet, what if you have a bad credit score? Would you still be able to secure a mortgage? How to get a mortgage with bad credit but good income anyway?
Luckily, getting a mortgage with a bad credit score is possible, especially if you have a high income. In fact, there are numerous mortgage lenders out there who specialise in offering loans to people with poor credit scores.
Here, we’ll give you a comprehensive guide about securing a mortgage with bad credit while emphasising the significance of your income.
About Bad Credit Score: An Overview
It’s essential to understand what bad credit means and how it’s measured in the UK. Typically, a low credit score can be a barrier in the way of seeking financial assistance, such as a mortgage.
What Is a Bad Credit?
A credit score or credit rating is like a financial report representing your creditworthiness. It reflects how lenders see you, meaning that the lower the credit rating you have, the greater of a risk you are to them.
Principally, having a bad credit score is often a signal of how likely a borrower is to default on a financial obligation. In the UK, credit reference agencies usually assess your credit history, representing it by a numerical score. By default, the lower that score is, the worse the credit.
Calculating Credit Scores in the UK
Various credit reference agencies in the UK calculate credit scores, such as Equifax, Experian, and TransUnion. While each agency may assign a slightly different score, they all use similar data to determine your creditworthiness.
Generally, credit scores range from 0 to 999, with the common ranges being:
- Excellent: 960+
- Good: 881—960
- Fair: 721—880
- Poor: 561—720
- Very Poor: Under 560
Factors Contributing To Having a Bad Credit
Basically, many reasons can cause a low credit score. Here are a few of them.
- Late or Missed Payments: Your payment history accounts for the major percentage of your credit score. Information like the number of late payments and for how long they were past due can affect your credit rating significantly.
- Credit Card Balance: This factor comes next in importance after your payment history. Maintaining a high balance or exceeding your credit limit can have a huge impact on your credit score.
- Bankruptcy: Such an extreme measure signifies your inability to repay debts and can stay on your record for many years. That’s why it’s essential to try and avoid filing bankruptcy.
- Frequent Credit Applications: Multiple credit inquiries can also affect your credit score because lenders may interpret it as a sign of financial distress.
- Defaulting on Loans: A loan default occurs when you fail to repay your past loans, showing financial inability to potential lenders. Unfortunately, it can lead to serious consequences affecting your credit score.
- Getting a County Court Judgment (CCJ): Such a legal order declares your inability to repay debts. Sadly, it becomes part of your credit history and is viewed negatively by potential lenders.
- Limited Credit History: The lack of credit history can affect your credit score as well. After all, lenders prefer borrowers with a proven track record of repayment.
How a Bad Credit Score Can Affect Your Mortgage Application
A low credit score makes it more challenging to secure a mortgage. Therefore, some lenders may be less willing to give you money or might do it with less favourable terms.
In this case, your income becomes a crucial factor. That’s because it can help offset the negative impact of bad credit when applying for a mortgage.
What Lenders Consider When You Apply for a Mortgage
When you apply for a mortgage, lenders evaluate many aspects of your financial situation. While your credit score plays a vital role, there are other key factors to determine whether you’re a suitable candidate.
Here are a few factors lenders consider when reviewing your mortgage application:
1. Credit History and Score
As previously mentioned, your credit rating plays an enormous part in your mortgage application. However, the minimum score needed to secure a mortgage in the UK can vary depending on the lender and mortgage type.
In general, conventional lenders require a credit score higher than 700. On the other hand, government-backed schemes or specialist lenders may be more flexible. Yet, their terms are usually less favourable.
So, while your credit score matters, it’s not the sole factor. Nevertheless, trying to fix it is always a fantastic idea.
2. Income and Employment
Lenders usually want assurance that you have a stable source of income to afford mortgage payments. After all, they want to decrease the risk of not receiving their money back.
Therefore, they review your employment history and income level. Consequently, having a verifiable and steady income is essential.
That said, it can be tougher for lenders to accept your mortgage application if you’re a private contractor or self-employed. That’s because your income from such jobs isn’t as stable as full-time employment income.
3. Debt-To-Income Ratio
Your debt-to-income ratio measures your ability to manage your existing debts alongside your new mortgage. Simply, it’s a comparison between how much you earn and how much debt you have.
Unfortunately, the higher this ratio is, the less likely lenders will approve your mortgage. That’s because having too much debt to pay can affect your ability to afford a new mortgage.
In addition to your debt-to-income ratio, lenders also assess your other outgoings. Such expenses include your childcare payments, household bills, etc.
4. Down Payment
The size of the down payment you’re willing to pay is another significant consideration. Naturally, a larger down payment shows your commitment to the property and reduces the amount of money you need to borrow.
Consequently, this translates to a lower loan-to-value (LTV) ratio, which is the proportion of the property’s value you’re borrowing. Overall, lenders offer better terms for borrowers with a weighty down payment and low LTV ratio.
5. Credit History Explanation
Lenders usually look at the last six years of your credit history. Typically, it’s the maximum amount of time that most of the credit issues remain visible on your report.
As hard to believe as it is, a simple letter of explanation can be a determining factor when it comes to mortgage approval. If you have negative marks on your credit report, you have the chance to provide an explanation for it.
Such a letter acts as a statement, allowing you to clarify the circumstances surrounding any credit challenges.
How To Get a Mortgage With Bad Credit but Good Income
Now that you understand everything about credit score, it’s time to discuss the deal with mortgages. Fortunately, it’s possible to get a mortgage with bad credit, especially if your income is high.
Here are a few ways to improve your eligibility for a mortgage.
A. Understand Your Credit Rating
Usually, it’s not enough to just know you have a bad credit score. Instead, it’s vital to have a comprehensive understanding of your financial situation. This means you need to:
- Request a Credit Report: Depending on the current situation, you have the right to obtain a credit report for free or low fees. You can do that through one of the UK’s major credit referencing agencies.
- Examine Your Credit Report: Review your credit report thoroughly, looking for any mistakes or inaccuracies. This includes information errors, late payments, outstanding debts, etc.
- Correct Errors: If you discover any errors on your credit report, you must take immediate action to dispute them. That’s because such mistakes can have a substantial impact on your mortgage eligibility.
- Make It a Habit: Make sure to monitor your credit score and stay informed about it regularly. After all, you should take advantage of your entitlement to a free annual credit report from each company.
B. Improve Your Credit Score
In general, a bad credit score is reversible. Luckily, there are many aspects you can work on to improve and increase your credit score. Not only does this enhance your eligibility for securing a mortgage, but it also helps you get it on better terms.
Here are a few tips on how to improve your credit score:
- Address Errors: Reviewing your credit report and correcting any mistakes you find on it should help raise your credit score significantly.
- Make Timely Payments: This is one of the most influential factors on your credit score. So, make sure to pay your loans, debts, and credit card balance on time.
- Reduce Credit Card Balance: Try to maintain your credit card balance below your credit limits, as it can affect your credit score negatively. Overall, consider paying down your credit cards that have high-interest rates first.
- Maintain a Long Credit History: The length of your credit history can affect your credit score positively. Therefore, you should avoid closing old accounts.
- Limit Credit Applications: Try to minimise the number of credit applications you submit. That’s because each application may result in a hard inquiry, which can lower your credit score a bit.
- Avoid Bankruptcy or CCJs: Take any necessary measures to avoid being in a situation where you have to file for bankruptcy. Along with County Court Judgments, bankruptcy can harm your credit score severely.
- Create a Budget: Take serious steps to manage your finances effectively. This helps you ensure you have sufficient funds to cover your expenses and make debt payments.
- Seek Professional Help: Ideally, you should seek help from a financial advisor who will be able to provide guidance on improving your financial situation.
- Be Persistent: It’s crucial to understand that improving your credit score takes time. Thus, you need to be patient in your efforts to rebuild credit.
How Long Should It Take To Improve Your Credit Score?
The time it takes you to improve your credit score depends on where you start and the type of issue you’re dealing with.
For example, fixing errors in your credit report can lead to instant improvements within one to two months. On the other hand, staying on track and making debt payments should impact your credit within just a few months.
That said, bankruptcy, for instance, can stay on your report for six to ten years, impacting your credit score during that time. So, it can be a long-term process to shake that off.
C. Save for a Larger Down Payment
When you aim to secure a mortgage with bad credit and a high income, it’s essential to think strategically. One of the best moves to enhance the likelihood of getting a mortgage is saving for a large down payment (preferably over 5% of the house value).
Primarily, a substantial down payment can:
- Lower the Loan Amount: When you pay a large down payment, the remaining amount you need to borrow decreases. This can make lenders more willing to work with you despite your low credit score because it results in less risk for them.
- Improve LTV Ratio: A lower loan-to-value ratio is encouraging to lenders. That’s because it translates to a lower loan amount.
- Lead to Better Interest Rates: The less money you owe to a lender, the lower the interest rates are. This means you get to direct more money towards the principal balance, which may lead to saving thousands of pounds.
- Increase Mortgage Options: With a larger down payment, you become eligible for a wider range of mortgage lenders and categories. In turn, it increases your chances of finding a suitable mortgage with competitive terms.
- Result in Reduced Mortgage Insurance: If your down payments exceed a certain amount (typically 20%), you may not need to pay for Private Mortgage Insurance (PMI). Consequently, it can save you a good sum of money.
D. Choose the Right Mortgage Lender
Finding the right mortgage lender for your situation is an essential step. That’s especially true when you have bad credit but a high income.
If you’re insistent on finding a mortgage deal yourself, take a look at some key considerations to help you choose the lender that would best serve your situation.
- Research and Compare: Start by researching various lenders and don’t limit your search to conventional banks. Instead, consider credit unions, nonbank mortgage lenders, mortgage brokers, etc.
- Review Terms and Interest Rates: Assess the interest rates and terms offered by each lender carefully. Conveniently, many lenders post their interest rates publicly online to attract potential borrowers.
- Evaluate a Lender’s Specialisation: You can find lenders who specialise in working with individuals with less-than-perfect credit scores. It’s best to search for such types of lenders as they may have tailored mortgages for your specific situation.
- Understand Your Options: Just like there are many types of mortgage lenders, there are mortgage types as well. So, it’s essential to know your options and understand them deeply before proceeding.
- Consider Customer Reviews: To get an idea about the lender’s reputation, pay attention to the previous customers and what they had to say. The experience of others who worked with specific lenders can be of great help to you.
- Verify a Lender’s Licensing: Make sure the lender you choose has a licence to operate in your area.
- Inquire About Application Fees: Ask about the mortgage application and origination fees. Since some lenders charge money for applications, it may affect the overall mortgage cost.
- Prioritise Communication and Transparency: Focus on choosing a lender that provides excellent information transparency and is responsive to all of your questions.
- Read the Fine Print: Mortgage documents can be boring to examine. However, reading them can save you a lot when comparing different lenders.
- Get a Pre-Approval: After narrowing down the list of potential lenders, the next step is getting mortgage pre-approvals. It shows your commitment to real estate agents and sellers.
- Seek Advice: Talk to family, colleagues, and friends who’ve been through a mortgage application process. They can provide valuable recommendations and tips based on their experiences.
Of course, a simpler way of ensuring you tick off all of the above points is to leave it in the hand of an expert mortgage broker. When the Bank Says No can help you find the right lender with the best mortgage deal for your circumstances.
A Final Thought
Knowing how to get a mortgage with bad credit but good income is crucial. Although securing a loan on such terms is challenging, it’s still possible, especially when you have an expert mortgage broker working on your behalf.
By understanding your credit issues and trying to resolve them, you can enhance your chances of buying a property. Therefore, you need to focus on improving your credit score, saving for a larger down payment, and then finding a mortgage broker to help you find the right lender.