The Fear Of Adverse Credit
Purchasing a home is a significant milestone in many people’s lives, representing stability, security, and a sense of accomplishment. However, for individuals with adverse credit, the dream of homeownership can often feel like they need more support. Adverse credit, characterised by a history of late payments, defaults, or bankruptcy, can cast a shadow of doubt over the possibility of obtaining a mortgage.
The fear of being denied or facing unfavourable terms can be overwhelming. Nevertheless, it is essential to understand that adverse credit does not necessarily spell the end of the mortgage dream. In this article, we will delve into the topic of adverse credit and explore strategies and options for individuals to overcome this hurdle and secure a mortgage that aligns with borrowers’ aspirations.
Understanding adverse credit
Adverse credit refers to a situation where an individual has an adverse credit history. This can include missed or late payments, defaults, County Court Judgments (CCJ), or even bankruptcy. These blemishes on a credit report can impact a person’s creditworthiness. Many individuals fear their mortgage applications will be rejected, leaving them stranded in their quest for homeownership.
Challenges faced by borrowers with adverse credit
Borrowers with adverse credit encounter several challenges when seeking a mortgage. Traditional lenders tend to have strict lending criteria prioritising borrowers with clean credit histories and high credit scores. Borrowers face higher interest rates, more significant deposit requirements, or outright rejection from mainstream lenders. 
One of the most significant challenges borrowers face is having adverse credit and being self-employed with less than two years of accounts. This combination can make it particularly difficult to secure a mortgage from some specialist mortgage lenders, let alone mainstream lenders.
However, this is a challenge that a mortgage broker can undertake; although it remains a doable prospect, it is subject to the specialist lenders’ criteria and requirements.
Overcoming the fear
Feelings of despair often arise when a mainstream lender rejects a mortgage application or when individuals anticipate rejection due to their credit profile. All high-street mortgage lenders are strict because they will likely reject an application outside their lending criteria. However, it is essential to understand that being declined by a well-known bank, such as Halifax, does not signify the end of the road for one’s mortgage aspirations.
While the apprehension surrounding adverse credit and its impact on securing a mortgage is understandable, it is essential to acknowledge that viable alternatives exist to surmount this obstacle.
Here are several strategies to help individuals with adverse credit navigate the mortgage landscape:
- Credit Repair: In our previous article, we discussed in full, The Impact Mortgage Application Has On Your Credit Score, so in a nutshell, taking proactive steps to repair and improve one’s credit is crucial. This can include paying off outstanding debts, disputing inaccuracies on credit reports, and demonstrating responsible financial behaviour over time. Obtaining a copy of your credit report is crucial when it comes to managing your financial health and making informed decisions, particularly in obtaining a mortgage. Working with credit agencies such as Equifax, Experian, or ClearScore can help in this respect. In addition, seeking professional advice can be immensely helpful in this process.
- Specialist Mortgage Lenders: Specialist lenders cater to individuals with adverse credit histories. These lenders have a deeper understanding of the circumstances surrounding adverse credit and are more flexible in their lending criteria. While interest rates may be higher, accessing a mortgage through a specialist lender can provide a pathway to homeownership. In lending, the expectation is that any high risks transactions come at a cost.
- More extensive deposits: A larger deposit can be achieved by demonstrating commitment and mitigating the perceived risk of adverse credit. Borrowers can effectively reduce the loan-to-value (LTV) ratio by increasing the money put towards property purchases. This can positively impact their mortgage chances and lead to more favourable terms.
The concept of risk lending level comes into play when considering the impact of a larger deposit. Lenders assess the level of risk associated with a mortgage application, considering various factors such as the borrower’s credit history, income stability, and the LTV ratio. A higher LTV ratio indicates a higher risk for the lender, as the borrower has less equity in the property.
By offering a larger deposit, borrowers reduce the lender’s risk exposure. It shows a strong commitment to the property purchase and signifies the borrower’s financial stability. A lower LTV ratio resulting from a larger deposit can give lenders greater confidence in the borrower’s ability to repay the mortgage.
Reducing the LTV ratio through a larger deposit can offer several benefits. Firstly, it increases the likelihood of mortgage approval, especially for borrowers with adverse credit. Lenders may be more willing to consider the application, as the reduced risk associated with a lower LTV ratio can outweigh concerns related to adverse credit.
It is important to note that offering a larger deposit is only a guaranteed solution for some borrowers with adverse credit. Each lender has its own criteria and assessment process; other factors, such as income stability and affordability, will also be considered. However, a larger deposit can certainly strengthen the overall mortgage application and increase the chances of approval.
- Building Stable Income and Employment History: Lenders also consider a borrower’s income stability and employment history. Demonstrating a consistent income stream and secure employment can help offset concerns related to adverse credit.
- Mortgage Brokers: Seeking guidance from experienced mortgage brokers can be invaluable for borrowers with adverse credit. Brokers have in-depth knowledge of the mortgage market, including specialist lenders who are more inclined to consider applications from individuals with adverse credit. They can help navigate the application process, identify suitable lenders, go through the affordability process and present the borrower’s case in the most favourable light.
What to do if your mortgage application has been declined
If you have faced a mortgage rejection from a high-street lender, it is essential to take the following steps:
- Avoid immediate re-application: Resist the urge to hastily approach another mortgage lender in hopes of a more favourable outcome. Applying for multiple financing options within a short period can negatively impact your credit report and potentially hinder future mortgage applications.
- Understand the reasons for the rejection: Take the initiative to inquire about the reasons for the rejection. This knowledge will help you prepare for future negotiations. If survey-related issues influenced the rejection, request a copy of the report. In poor credit, obtain your credit reports.
- Seek assistance from a mortgage broker: Consulting with a qualified mortgage broker is the most prudent course of action if a high-street lender has declined your application or if you anticipate rejection. Our service provides carefully selected brokers with the expertise and experience to convert a rejection into an approval.
We can also identify alternative lenders more likely to accept your application than those seen on the high streets. Whether it requires representing, an appeal, or a new application with a different lender, we can assist you in this endeavour.
Summarisation
The fear of adverse credit jeopardising the dream of homeownership is a common concern for many individuals. However, it is essential to remember that adverse credit does not necessarily prohibit one from obtaining a mortgage. By taking proactive steps to improve credit, exploring options with specialist lenders, considering more significant deposits, building stable income and employment history, and seeking guidance from mortgage brokers, borrowers can overcome the challenges associated with adverse credit. With determination, patience, and the right support, the dream of homeownership can become a reality, even for those with a less-than-perfect credit history.
