Owning a home can seem like an impossible feat if you have a bad credit history. But there’s hope! While lenders will consider your credit worthiness before granting a loan, here are 15 tactics you can use to get a mortgage if you have bad credit.
1. Get a credit-builder credit card
This will help you establish a history of using credit responsibly, and you can apply even if your credit score is weak. Just make sure you pay it in full each month by the deadline, and avoid withdrawing cash or borrowing on this card.
2. Avoid opening new credit
Each time you apply for credit, it is recorded on your credit file. Your credit score sometimes can fall when you make an application, and repeated credit applications can look unfavorable to lenders. So, plan your applications for credit carefully. Avoid making ones that might be rejected or repeated attempts in a short timeframe. Generally, you should leave six months between credit applications.
3. Register to vote
Lenders and credit reference agencies use the electoral roll to track your history. So, registering to vote should be one of the first things you do each time you move. Just being on the electoral roll can give your credit score a boost.
4. Clear up any errors
It’s important to check your credit reports from all of the three major credit reference agencies: Equifax, Experian and Call Credit. You now can do this for free on many websites. Sometimes errors can show up in your report and bring down your score. If you find anything that seems amiss, contact the company involved as soon as possible.
5. Count your rental payments
Your rental payments typically won’t influence your credit score, even if you have a long history of paying on time. To make your rental payments count, you can register with Rental Exchange, a free scheme that collects your payments and passes the information to Experian.
6. End financial ties to ex-partners
If you live with or marry someone with a bad credit rating, yours only will be affected if you take out financial products together. For example, opening a joint bank account. Once you’ve done this, you create a financial association, meaning lenders may look at that person’s credit history as well as yours. If you move out or the relationship ends, make sure you ask all three credit reference agencies to sever this financial association on your record.
7. Pay on time, dispute later
Defaults can drag down your credit score, and lenders may be reluctant to approve someone who has missed payments in the past, even for something as simple as an electricity bill. For this reason, if you’re in a dispute with a provider, it’s best to continue paying in full and on time until the issue is resolved.
8. Prioritize mortgage payments
Lenders may be willing to overlook a missed phone bill or late credit card payment, but most will reject an applicant with missed mortgage payments on their record. If you already own a home but are struggling to make ends meet, put a priority on paying down your mortgage—even just in part—and contact your lender to discuss your options as soon as possible.
9. Be wary of debt-management plans
A debt-management plan is an agreement with a creditor to repay a limited amount of your debt each month. This can help bring your debts under control and may be critical to helping your climb out of the hole. But lenders tend to view debt management plans in a highly negative light, as you’re effectively defaulting every month. Treat this option as a last resort.
10. Bide your time
The more recent your negative credit history, the more cautious a lender likely will be. For missed payments, lenders will want to see at least two years of on-time repayments and good credit management before you apply. For more serious blights on your credit history (including a judgment for an unpaid bill), you might have to wait up to three years or more, although it may depend on the amount outstanding. Bankruptcies are considered most serious, and even specialist lenders likely will expect you to wait at least six years after one has been discharged.
11. Provide an explanation
Lenders may be more understanding if you can offer an explanation for your financial difficulties. For example, you were going through a divorce or you were laid off or facing an illness. It’s worth gathering documentation that backs up your story and provides helpful context to add to your application.
12. Borrow less at a lower LTV
Lenders are looking to minimize their risk. If your history raises concerns, you need to find other ways to seem like a low-risk applicant. One option is to borrow a lower amount than you would otherwise so that your income ratio is higher. Alternatively, it can be worth trying to put down a larger deposit (say 20 percent or more) so you can offer more security.
13. Consider your partner’s situation
When you buy together with a partner, the lender will consider their financial situation as well. This can be a boon if their credit rating is stronger than yours. You also could consider a joint mortgage with a family member if you need to boost your application. Just keep in mind that they’ll own a share of the property, and there may be implications for first-time buyer entitlements if one of you has owned before.
14. Try adding a guarantor
With a guarantor mortgage, your family member offers their own home as security against the loan. Adding a guarantor to your mortgage may give the lender more confidence in your application and improve your chances of being accepted. The stakes are high for both you and your family member, so be sure you can continue repaying your loan now and in the future.
15. Work out which credit report your lender uses
Due to the nature of credit reporting, your score could be excellent with one credit reference agency and poor with another. Many lenders will only seek reports from one of the three agencies. If you look great in a particular agency’s report, find a lender that uses that one. Remember, though, that each lender has its own credit scoring system. The scores you see from the credit reference agencies only give you an indication of your credit health, not the complete picture.