The UK has one of the most efficient and successful housing systems globally. The government has been supportive of the real estate sector helping builders with planning targets, prospective homeowners with low-interest rate regimes, and investors with streamlined regulations. Having said that, homeownership in the UK is still one of the biggest challenges for households and COVID-19 has only but aggravated the crisis.
However, it is also true that the well-oiled homeownership system leans in favour of those with housing assets and capital. This leaves an important part of the population, those with bad credit, unattended. Having a low credit score makes it difficult for households to be approved for mortgages thus blocking the conventional pathway to owning a home. Thanks to financial innovation and choice, there are still some other options that allow bad credit borrowers to access loan facilities with no money down payment to help them buy a home.
To put your bad credit into perspective, think about a score of 560 and below on Experian or 566 and below on TransUnion. With such scores, chances of getting rejected for credit cards, mortgages, auto loans and other mainstream credit products are extremely high. This guide will walk you through simple tips you can follow to enable you to buy a home even if your credit score is low or generally considered bad. Let’s dig right in!
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Establish How Much You Are Willing to Pay
In the year ended March 2019, the value of the residential real estate in the UK was estimated at £251 billion. This includes condominiums, villas, and other housing types. According to data from HM Land Registry, the average cost of a house in the UK as of December 2020 was £251,500. As the first step, you must determine how much you can part with. This will narrow your focus and energy on where you need to shop for the house.
To help you arrive at the figure you can realistically put forward as your budget for a home purchase, consider the following basic numbers.
- Your total monthly or annual pre-tax income
- The total you owe in debts including student loans and auto loans.
- The amount of savings you have set aside for a down payment.
One thing you must bear in mind is that if you have poor credit, you may be required to put more cash as a down payment.
Also, look at your debt-to-income ratio to determine how much of your income goes towards servicing debt monthly. Most lenders look at a ratio of about 36% as the rule of thumb, the lower the better.
Get to Know Your Credit Score
Once you’ve established how much you can afford for the house, get your credit report and look at your score. Lenders always look at your score when determining whether to approve your mortgage or not and if yes, at what interest rate. The lower the score, the higher the cost of finance because of the inherent risk of default.
You can get a free report from any of the three major credit reference agencies in the UK, Experian, TransUnion, and Equifax, at least once a year. If you find any errors as you go through your reports such as account reporting errors, personal information inconsistencies, mistaken accounts, debts from your previous engagements and others, you need to file for a dispute. This will help you clear the errors and boost your score.
For the other legitimate negative marks such as late payments, consider writing an explanation to the lender telling the situation as it is and ask them to consider your application.
One thing you need to be careful on is that some lenders may delay your loan processing until the disputes are resolved or withdrawn whichever the outcome.
Shop Around for The Best Mortgage Lenders
With a bad credit score, you may struggle to get approved for conventional loans. Typically, these are loans aimed at people with good to excellent credit scores. With a bad credit score, you may need to approach lenders for non-conforming loans.
While it is easy to get approved on these loans, you need to be careful about where you shop in the market. Some lenders may charge high-interest rates or impose extra fees or additional insurance requirements. The best approach around this is to get a credit broker who will enable you among other things to compare lenders and make enquiries at zero fees.
Get about three lenders and see what they offer you in terms of loan sizes, interest rates, and repayment periods.
Get A Co-Signer to Guarantee Your Loan
If you’ve explored all potential lenders and still feel that you may not get approved at your preferred loan terms, there is still another option, getting a co-signer. The co-signer contractually accepts to pay off the loan if you fail to for one reason or the other.
With the involvement of a co-signer, who could be your best friend or family member, you stand a chance of getting approved at favourable terms. For instance, you may get a lower interest rate, a longer repayment period, or a bigger loan size.
The lender will examine the creditworthiness of the co-signer and look at things such as their income, their debt-to-income ratio, their expense to income ratio and other qualifications. If you can, bring in a financial advisor to help you both understand the impact of the co-signing arrangement.
Set Aside a Larger Down Payment
The size of the down payment reflects your seriousness and determination in buying the house. If you have bad credit, the best way to get a good deal on a mortgage is to prove to the lender that you can afford a sizable down payment.
There are two ways around this, saving for the down payment or shopping for bad credit loans to help you beef up your deposit. For instance, if the property goes for £200,000 and you are asked to put down a 10% deposit, that amounts to £10,000. However, putting up a bigger deposit say 15%, will reduce your monthly repayments and improve your chances of being accepted.
A low credit score is certainly a disadvantage when looking to buy a house, but there are options around it. That being said, you must establish the amount of money you are willing to spend, check your credit status, and then shop around for the best mortgage lenders. While bad credit loans such as guarantor loans and personal loans may not be enough to pay for the house, they can help you raise your deposit to get better mortgage deals.