Are you preparing to purchase your first home? If so, then you have a lot of different factors and variables to consider. One of the most important is your credit rating. Your credit rating is determined by how reliable you are with paying money that you borrow or paying money that you owe in bills and other expenses. If you have a significant level of debt, then it’s more than likely that you do have bad credit.
You might think that issues with bad credit aren’t particularly common. However, this isn’t the case. According to the latest research 40% of adults have admitted to missing debt payments. This does put them at risk of issues with bad credit.
Different Types Of Bad Credit
There are various types of bad credit. Not all the examples will impact your credit score in the same way.
One of the most commonly understood forms of bad credit is a low score. This can be a score by various resources and you might find that your score differs from company to company. The main score to focus on is your FICO score as this is the one that banks use when determining whether to grant a mortgage.
It is important to remember that all lenders have their own internal scoring system which is not directly reflected in your actual credit score
A county court judgment could negatively impact your ability to get credit for upwards of six years. If you pay the CCJ in full within one month then you will be able to apply to have it removed from your credit file.
A default will always show up on a credit check and will negatively impact your chances of getting a loan. It shows lenders that you have struggled to repay the credit in the past.
All defaults will be removed from your credit file file after 6 years.
Missed payments on your credit cards are always going to negatively impact your credit score. That’s why it’s important to keep a check on your payments and ensure that you are doing everything that you can to complete payments on time each month.
Bankruptcy can impact your credit score for years. This is why you should always explore other options before filing for bankruptcy. It’s best to avoid it if you can as it is a long road to recovery.
If you take out a payday loan, you will immediately be at risk of bad credit because they are always going to be difficult to pay back on time. That’s why you need to make sure that you understand the rates of interest before committing to a loan like this.
Not only do pay day loans potentially cause credit issues when repaying, they reflect negatively on you as an overall profile. They are a short term finance option which shows to a lender you struggle with everyday payments/living costs. Lenders will usually only consider applicants with pay day loans that are older than 1 year old. A the mortgage library we have specialist lenders that acceptpay day loan history as part of a bad credit mortgage application.
What Does It Mean To Be Credit Impaired?
If you are credit impaired, it means that your creditworthiness has deteriorated over time. It’s worth noting that either an individual or an entity can be credit-impaired. Typically this will be reflected through a low credit score if you are an individual or a significant reduction in your credit rating. This is assigned by an entity, lending, or rating agency. If you are credit impaired, then you will typically have less accessibility to credit facilities. You might also need to pay high-interest rates on any loans that you decide to take out.
There are numerous reasons for impaired credit. Typically, it is due to something impacting an individual's income. Job losses or long-term illness can lead to problems with credit getting worse over time. Alternatively, an individual might just have failed to pay their credit cards on time.
It’s worth noting that impaired credit can be a temporary problem that is easily reversed. Or, it may be the first sign that a borrower is in financial distress. Usually, impaired credit will require an individual to take drastic action to ensure that the situation can be corrected. Regardless of the situation, you will find it impacts your life. It can, at the very least, complicate your path to getting a mortgage.
If you are interested in checking your credit score it is possible to do this by contacting your bank. Most banks will allow you to check your FICO credit score. The highest score that you can obtain is 850. Although anything between 670 and 739 is considered to be a strong credit score.
Can You Still Obtain A Mortgage With Bad Credit?
If you do have a bad credit score, then you might assume that it’s going to stop you from getting a mortgage for your home. You could be right here. However, there are options available to you. For instance, it is still possible to obtain a mortgage with a bad credit history. Although, your options might be far more limited than you would like.
Lenders will always complete a credit check on anyone who is deciding to apply for a mortgage. However, not all credit histories are equal. It depends on the amount of money that was involved as well as how much time has passed since you have had issues.
Most banks will refuse to provide you with a mortgage if you have a history of bad credit. However, other lenders can be more flexible and there are also lenders that specialize in providing bad credit mortgage options. They tend to cater to people who have faced life-changing events including divorce and illness.
If you have bad credit, you need to make sure that you are taking the right steps to improve your chances. For instance, you should think about giving it a little more time. The more time that has passed, the more likely it is that you will be approved for a mortgage even with a bad credit history. You should also think about your partner’s debt if you have one. Their history will also be taken into consideration when determining whether you can access a mortgage on the market.
It can be tempting to try and hide issues with bad credit when you speak to a mortgage provider. However, honesty is always going to be the best policy. It’s far better for you to provide the information that they need rather than them finding it with their own means.
Improving Your Credit
If you are interested in obtaining a mortgage with a more positive interest rate, then you need to take the right steps to improve your credit score. There are a few steps that you can take here. First, you need to make sure that you do understand what you are working with. This means that you should access a full credit report from the national credit bureaus. By knowing what you are working with, you will have a clear understanding of the steps you will need to take to improve.
The majority of the top lenders use FICO credit scores. This is determined by:
- Payment history
- Age of credit accounts
- Credit mix
- Fresh credit inquiries
- Credit Usage
The most important factors are credit usage and payment history. This is why it’s important that you are working to pay off or at least get a grip on any debt that you have accumulated. You need to make sure that you are taking steps to avoid late payments. You can do this by setting due-date alerts or ensuring that you automate bill payments directly from your bank account. You can also consider charging all or the majority of your payments to your credit card. This will work in your favor as long as you make sure that you do pay the balances in full each month.
You should also work to improve your credit utilization. This refers to the portion of the credit limit that you are using at any point in time. It is the second key factor that is taken into account with your FICO credit score. The easiest way to handle this is to make sure that you are paying off your credit card balances each month in full. If you can’t afford to do this, you need to make sure that you keep your outstanding balance around 30% or less.
You might also want to consider borrowing money that you know you will be able to afford to pay back. Borrowing money and buying on credit cards isn’t always the negative it seems. You just need to make sure that you retain control over how much you are borrowing.
It’s also important to limit your requests and “hard” credit inquiries. A hard inquiry could include anything from a new mortgage to a new credit card or an auto loan. This could negatively impact your credit score for months.
We hope this helps you understand everything that you need to know about bad credit mortgages. The important factor to keep in mind here is that bad credit doesn’t need to stop you from getting a mortgage on a home. You can still access this possibility. You just need to explore the options available to you on the market and be aware of the issues with bad credit mortgages. It could also be better to take steps to improve your credit rating over time. That way, when it is time to take out a mortgage on a home, you will be able to access a far more favourable deal.