Financing is difficult even for the best of borrowers. Lenders are on edge, tight with money and very sketchy about how they process applications. They don’t want to be played so they play their cards close to their chest.
For you, that’s a problem, but it is one that you can move past to obtain a mortgage, even if you’re shackled with bad credit.
So let’s get started and get your homeowner loan approved!
- Show stability
Stability applies to both your job and how you manage debts. It’s not a wise move to take on a mortgage when you’ve no credit history. First off, doing that means you’ve no real experience at money management, budgeting, and paying on time, which can be a shock to the system when we finally start doing grown-up things, but more important is that lenders need to know you can manage your money. They want to see your credit report with a long-proven record of on-time payments.
Naturally, with a bad credit rating, you’re off to a trickier start, so the next best thing is to turn your weakness around and play it up by demonstrating that the accounts are being paid. It doesn’t matter by how much, so long as your history shows that when you’ve found yourself with money problems, that you have addressed them head-on by making alternative payment arrangements and not run away, buried your head in the sand and hoped the creditors would get off your back.
Stability also applies to your work history. A few years working in your local KFC is much better than six months with a new employer with higher earnings, regardless the amount.
- Pay down your debts to increase your disposable income
You need to have money to play the homeowner game. It’s not an option because you need to pass a mortgage affordability test. That’s easier said than done though.
One of the ways that will definitely help you meet that requirement is to have less debt. It’s not just your mortgage that’s considered as it’s all your debt; it’s your cost of living, which is higher if you’re living outside of your means.
As a rule of thumb, run with proportions, some financial experts will advise that no higher than a 30% proportion of your income should be spent on mortgage payments. However, to get more specific on debt proportions, Virginia Wallis of the Guardian answered a reader’s question way back in 2010, and the advice remains relevant today.
“…the total amount you pay towards your mortgage should not exceed 28% of your gross (rather than net) income. And you should make sure that you don’t go over 36% of gross income for the total amount you spend on all borrowing, including a mortgage.”
Grab your calculator or the app on your smartphone and crunch the numbers to reach the amount of total debt you’re spending.
Be mindful of a poor credit history because you do not want to sail close to the larger end of 36% of your income is spent on debt repayments. Aim to get that figure as low as possible. The lower it is, the better your chances of getting a homeowner loan approved.
- Be ready with an income and expenses spreadsheet
There’s nothing going to be more uncomfortable for a lender assessing your risk level than discovering you haven’t a clue what you spend on any given month. Have a spreadsheet detailing your monthly bills, including what you spend regularly daily. If you’re 80p a day for a newspaper, include it. £1.50 every few days for milk, include it. Let creditors see that you know exactly where your money goes.
- Save loads
Lenders love big down payments because it’s less risk for them and more risk to you. The higher a deposit you can make, the better because you’re asking for less and the security on the property you buy will have a higher value, so you will have a higher home equity, meaning you’ll have more to lose if you do default on the payments.
- Investigate Government Schemes
The government-run initiatives on occasion. Schemes such as Shared Ownership, Shared Equity, and the Starter Home Scheme may be options however not all are suited to those with bad credit. It’s worth knowing what’s available as you could find that if you’re between the ages of 23 and 40 years old, then from some point in 2018, should the New Starter Home Scheme go ahead as planned, then you could get a 20% discount off the cost of a new-build home, lowering the mortgage amount you would need to secure. That lower cost you’re asking for could help sway lenders to approve your loan.
The only current scheme that won’t work for those with bad credit is the government’s Rent to Buy scheme as you need to have a good credit score.
- Use the Notice of Corrections on credit files wisely
A Notice of Correction (NOC) can be added to your credit file to explain information that isn’t accurate or to explain that you had extenuating circumstances.
An alternative is to try with an explanatory letter; however, the formal route is to add an entry to your credit file explaining extenuating circumstances to your credit file or to address non-factual information contained in your credit history.
Taking this action means creditors must review your application. This will happen because a NOC on your credit report will eliminate your application from automated credit scoring processes.
The problem you’ll find is that you have a limited word number. You only get 200 words to explain yourself. So, in addition to a NOC, provide further information by attaching an explanatory letter to your application so that the lender reviewing your circumstances has complete clarity.
To be sure you’re using the NOC approach wisely you can read our post “Does a Notice of Correction Help or Hinder?” Because it can do both depending on how and why you use it.
- Close unused credit accounts
Any credit you have available to you is considered for a credit assessment. Your debt ratio is based on credit available and not your total debts outstanding. For that reason, if you have had a credit card in the past and cut it up and left the account dormant, that’s still officially a line of credit you have. You can call up and get a new card then use that to run up debt.
Mail order companies are another thing to consider as many will extend a certain amount of finance, such as £1,500 and even increase that periodically if you prove you’re good with managing your account by repaying always on time.
You could be extended finance with a limit of £300 on a first purchase, then regularly use that account and have your maximum borrowing limit increased from £300 to £3,000. It is worth reviewing any credit accounts you have, check the limits in place for each and whatever you don’t use, contact the company to request the account be closed.
By closing dormant accounts that give you access to credit, you will lower your available debt and thereby increase the amount you can afford to borrow.