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TheMoveChannel.com | Bad Credit Mortgages

Introduction

Bad credit mortgages are the rough and ready name for mortgages that are just as likely to be found under a number of other guises, including impaired or adverse credit, sub prime or full status mortgages. Between them, they account for a pretty large section of the mortgage market.

It used to be the case that if you didn't have a perfect credit record you couldn't get a mortgage from a high street lender. But now, the lending market has become so diverse that there are products to fit every credit profile. Very distinct sectors, rare to find lenders that cater for all of them equally.

Today's borrowers can choose from a large number of special products that are aimed specifically at those people with some form of impaired credit history. These mortgages do not differ vastly from other mainstream mortgages - you can usually find discounted, fixed, capped and even base rate tracker bad credit mortgages.

However, there are certain key differences in comparison to standard mortgages:

Impaired credit mortgages have historically offered rates of interest that were significantly higher than normal mainstream mortgages, often charging a premium of one, two or even three percent more than mainstream conforming mortgages. Although increasing price competition amongst lenders has means that interest rates among sub prime mortgages are getting ever-closer to the Standard Variable Rates offered to mainstream borrowers, there is still a slight premium, depending on the particular product and the degree of bad credit that is acceptable to the lender. It is also almost impossible to find discounted deals and introductory offers that are as competitive as those offered to mainstream borrowers.

The approach to underwriting on the part of the lender is different. Rather than use an automated credit scoring system, most lenders that service this sector of the market adopt a case-by-case approach. A non-conforming lender is more likely to lend to an individual, but is likely to be rather more conservative in terms of the amount that they are willing to advance.

As well as being less willing to loan large sums of money, bad-credit lenders are usually more demanding in terms of the size of the deposit you are required to contribute to the asking price of your chosen property. Many impaired credit lenders are not willing to advance more than 75% of the property value.

A final feature of many impaired credit mortgages, though one that is not by any stretch unique to them, is the fact that there can be extremely severe early redemption penalties. These can be more onerous than with mainstream mortgages both in the size of the penalty that will apply and in terms of the length of time for which the penalty period lasts.

Credit History

Most people have a period in their lives when they are short of money. Usually it is possible to tighten your belt, weather the storm and somehow get through the sticky patch. But sometimes the financial situation either becomes too difficult to manage or does not take priority compared to other matters in your life.

Divorce, redundancy, or illness can leave you with insufficient funds to meet all your mortgage, HP, loan and credit card payments. But even if you fall into arrears just for a short time, the repercussions can last for much longer - credit records usually run for 6 years.

It is estimated that one fifth of mortgage applicants are not considered suitable for loans by the mainstream lenders that operate credit-scoring systems. The reason that people fail such checks is that mainstream lenders operate in a world of percentages. They want a large volume of low risk business - people who have a good credit profile and who appear to represent the most likely group of people to repay their mortgage on time. But if there is something that is flagged in the credit scoring system, most mainstream lenders will regard lending you money as a high-risk activity. Many will not lend you money at all and when you can get a loan, you will undoubtedly have to pay a higher rate of interest than you would do otherwise.

You can fail the credit-scoring test for a variety of reasons, though not necessarily because you have previously defaulted on payments. Some of the more common reasons are as follows:

  • The purpose of the loan
  • Failure to appear on the electoral roll
  • The work or income history of the applicant
  • Missed repayments on a mortgage or another form of credit
  • Debt-related County Court Judgements
  • Bankruptcy
  • Being a director of a business that has gone bust
  • Having your home or other possessions repossessed

All these things are normally recorded by the big credit agencies and can prevent you from being offered the standard mortgage products. Unless you have a particularly good relationship with a lender - you may for instance have had current or savings account with them for some time - then you may be forced to go to a non-conforming lender.

Lending Criteria

The majority of lenders in the sub prime market employ specialist underwriters rather than an automated credit scoring system and assess cases individually. This allows lenders to focus on whether you are willing and able to make your repayments, rather than whether you have historically always done so.

If you do have some form of impairment to your credit history, the first thing to do is to make the lender fully aware of the details of your financial circumstances. Keeping things hidden or not disclosing the full details will not help your cause and you should be as open and as honest as possible. If for some reason the lender finds out that you have lied, you will not get the mortgage and you may even face further action, depending on how far you get with your application or even mortgage repayments before the truth comes to light.

Most lenders will take an holistic view an look at the size, nature and timing of the debt. For instance, if you went through a divorce, fell behind with your loan repayments but then got back on track and have been fine since, your situation is much more likely to be looked on sympathetically than someone who consistently runs up large debts and falls foul of his or her creditors.

Once a lender is possessed of all the facts, they will then make a decision taking into account your individual situation and the type of case they are looking to take on.

Not all non-conforming lenders are looking for the same type of business, which is why the lending criteria will be different depending on who you go to. There are many lenders who will consider your case if you have one CCJ or minor bad credit event. There are a decreasing number who will lend to people with multiple CCJs or who show evidence of a persistently bad credit performance. The acceptable lending criteria can be broken down even further and some lenders are highly specific in terms of the type of cases they with policies such as:

  • Only lending to people with fewer than a certain number of months arrears on any mortgage or other loan product.
  • Accepting applications from people with CCJs, but only once they have been cleared.
  • Others will consider applications but will only lend the money once CCJ has been cleared.
  • Some will only consider applicants whose CCJ was for a value below a certain level, with an average around £250 for moderate impaired credit lenders. You will have to hunt around more if your CCJ was for a higher value.
  • Some lenders on the more extreme end of the market will allow you up to three CCJs with a combined value of £3000.

Even in the worst circumstances, as long as you are talking to a lender at the right end of the sub-prime spectrum and you can show that your situation has changed and that the reasons for the earlier defaults were due to exceptional circumstances, then you should still be able to secure some borrowing.

It's worth remembering that individual products have thresholds of tolerance as well as the lenders themselves. Generally, the more extreme the circumstances, the higher the rate you will pay and the more restrictive the loan amount and loan-to-value terms. This means that you should shop around and find the mortgage and the lender that is right for you, particularly if your credit history is only marginally impaired.

Light Adverse and Credit Repair

Light adverse and credit repair mortgages plug the gap between mainstream loans and the more extreme cases of the sub-prime mortgage market.

Credit repair mortgages are schemes that give the borrower an incentive to stay on the straight and narrow by rewarding mortgage borrowers who maintain a 100% credit record. This usually takes the form of successive reductions in the rate of interest payable over a number of years. These are particularly popular among those with minor credit problems who are eager to clear their history but who are open to the idea of being encouraged to take a responsible approach.

Light adverse mortgages are designed for people who are just on the margins of the sub prime market, whose credit history is only slightly less than perfect, but who may well still struggle to get a mortgage from a mainstream lender.

Almost everyone who ends up getting a light adverse or credit repair mortgage would also be accepted for a sub prime mortgage. However, they would be unnecessarily penalised with too high a rate, due to the fact that the plan is designed for people with more serious credit problems. The advantage with a light adverse credit mortgage is that because the mortgage is designed for people with less than severe credit problems, the risk to the lender is lower than with other sub prime mortgages, so the LTV can be higher and the interest rate can be lower.

Past credit events that may call for a light adverse credit mortgage include not appearing on the electoral roll, maintaining several different jobs, moving house repeatedly in a fairly short space of time, very minor CCJs or ones that are soon to be removed from the credit record following a long spell of unblemished payment records.