If you looked at the mortgage industry in 2008, just after the 2007 recession, lenders catering to clients with poor credit had almost completely disappeared. Some lenders moved to more mainstream lending only and many of the adverse lenders from the early 2000’s were forced to exit the market completely.
Now in 2017, there are a huge amount of options for clients who have experienced financial difficulty. There are several different types of adverse credit events, all of which are looked at differently. For this article, we can put these into the following categories:
Light adverse – Missed payments on unsecured debts such as credit cards, loans or utilities, or exceeding an overdraft facility
In cases of light adverse events, many of these clients will still be able to obtain mortgage from a mainstream high street lender. This depending on the amount of missed payments which have occurred and how recently they took place. A good broker will know the lenders who have easier credit scores to pass and often these cases can be placed on close to market leading rates.
Medium adverse – Unsecured arrears, defaults, county court judgments or missed mortgage payments
Again, the main factor for lenders here is how long ago they occurred, the value of the default or judgement and some cases if they have been settled or are still outstanding. Some lenders will ignore anything that is 2 or 3 years old, with some even considering smaller defaults within the last 12 months with a reasonable explanation.
Heavy adverse – Debt management plans, IVA’s, bankruptcy or repossession
While most of the high street will not consider an application involving an IVA, bankruptcy or repossession for 6 years until after the event, you may be surprised to hear there are still a significant amount of options for clients who have had significant adverse events. This is an area which is almost exclusively catered for by small, specialist banks and building societies who can look at each case on its merits. One thing that is key here is understanding what caused the event. Lenders will look more favourably on cases which have come from a marriage breakdown, sudden illness or loss of employment, rather than clients simply living beyond their means and being unable to pay back their debts. Lenders here will also be looking very closely at bank statement conduct and the financial history since the event took place. Ideally all credit needs to have been conducted well since the time of the incident. There are mortgage options available for clients who are still in an IVA or debt management plan, if that has been conducted satisfactorily.
The two biggest challenges in this area are in fact not someone’s credit profile, most commonly it is affordability and loan to value.
The lenders in the medium and heavy adverse space will not lend the 4-5x multiples of salary you will be used to on the high street. It is common for people seeking a mortgage who will have used a high street lender’s affordability calculator to estimate how much they can borrow, to be disappointed these figures are not likely to be achievable with the specialist lenders they have available to them.
Loan to values are also restricted, there are some lenders offering mortgages up to 95% here but depending on how severe the issues, lending could be limited right down to 60% LTV for the most difficult cases.
What to do if you have adverse credit and want to get on the housing ladder
– Speak to a broker as early as possible. Even if you may not be able to obtain a mortgage now, if this is something you want to move toward over the next few years it’s best to speak to a specialist broker sooner rather than later. NM Finance can advise how best to repair your credit profile and what options will be available to you and when.
– Keep track of your own credit – Many clients need help them with their poor credit, but they don’t have access to their own credit file. While free reports such as Noddle can be useful, if you are serious about improving your credit it is recommend to use the full paid report from Experian. You would assume that your credit profile is the same on each credit system but often it’s not, with some items showing up on one providers search and not the other. Experian is the most commonly used credit search system by mortgage lenders.
– Think about what your bank account conduct looks like. How you conduct your day to day finances is very important to the underwriter. You may be able to borrow the required amount on the lenders affordability calculator but if your bank account shows you are under financial stress, the lender may still decline.
– Cancel credit items which are not being used and be wary of taking out more finance in the run up to making a mortgage application. While having no unsecured debts is ideal, lenders will still note ‘accessible credit’. If you have paid down £30,000 of credit card to zero, call the providers and cancel the cards.
– Pay day loans. Never take a pay day loan, while these often won’t affect your credit score directly, having any pay day loans within the last 12 months will usually be an instant decline from lenders. They are a clear sign that an individual is struggling with their finances.