Adverse Credit and Its Significance for Home Buyers

Adverse credit refers to a negative financial history that can make borrowing money difficult. It is also known as bad credit or a poor credit score. Adverse credit occurs when someone has a record of financial issues such as missed loan payments, defaults, County Court Judgments (CCJs) or bankruptcy. These issues appear on your credit report, which lenders use to assess your creditworthiness.

Credit reference agencies such as Experian, Equifax and TransUnion calculate your credit score. Lenders check your credit report when you apply for a mortgage or other loans. If you have adverse credit, it signals to lenders that lending you money could be risky. This can affect your ability to secure a mortgage or result in higher interest rates if you are approved.

What Causes Adverse Credit?

Adverse credit can result from a variety of financial problems. One of the most common causes is missed payments. If you miss payments on credit cards or loans, this is recorded in your credit report. A history of frequent missed payments can significantly harm your credit score. Defaults occur when you fail to pay back an agreed loan in full, leading to a formal record on your credit file.

More severe financial issues, such as CCJs or bankruptcy, can have an even greater impact. A CCJ is a court order that requires you to pay a debt. Bankruptcy is a legal process that declares you unable to pay your debts. Other factors, such as exceeding your credit card limit or applying for too many loans within a short period, can also lower your credit score. Even small financial missteps can accumulate to create adverse credit over time.

How Does Adverse Credit Impact Buying a Home?

Adverse credit makes buying a home more challenging. Lenders assess your credit history when deciding whether to approve your mortgage application. If you have adverse credit, lenders may see you as a higher risk. As a result, they may charge you higher interest rates or require you to pay a larger deposit. For example, instead of a 10% deposit, you may need to put down 25% of the property’s value as your deposit in order to be able to obtain a mortgage.

Your adverse credit history might also limit the type of mortgage deals available to you. Some lenders may refuse your application outright, while others might offer specialist bad credit mortgages. These usually come with higher costs but are designed to help people with poor credit to buy a home. Improving your credit score before applying for a mortgage can help you access better rates and save money in the long run.

How Does Adverse Credit Impact Selling a Home?

Selling a home with adverse credit can present its own challenges. If you are behind on your mortgage payments, your property could be at risk of repossession. This complicates the sale process and may reduce the value of your home. Lenders may also be less willing to approve a new mortgage for your next property if you have financial difficulties.

For sellers with adverse credit, it is essential to maintain clear communication with their mortgage lender and seek advice on how to manage their debts effectively during the sale process.

Can You Get a Mortgage with Adverse Credit?

Getting a mortgage with adverse credit is possible, but usually requires additional effort and planning. Specialist lenders cater to people with poor credit histories. Unlike traditional lenders, these companies consider your current financial situation and ability to repay the loan, rather than focusing purely on your credit score. However, the terms offered may not be as favourable.

Bad credit mortgages often require a larger deposit and come with higher interest rates. For instance, while a standard mortgage might be offered with a 5% mortgage interest rate, a bad credit mortgage interest rate could be 7% or higher. It is also important to note that these mortgages might not have some of the features, such as flexible repayment options, that other, more standard mortgages might have. Working with a mortgage broker who specialises in bad credit mortgages can help you find the best deal for your situation.

How Can You Improve Your Credit Score?

Improving your credit score is possible, but it can take time and consistent effort. Start by checking your credit report for any errors or inaccuracies. Mistakes, such as a mis-recorded payment, can harm your score. Correcting these errors can give your score an immediate boost. Next, make sure you pay all your bills on time. Consistently meeting payment deadlines is one of the most effective ways of improving your credit score.

Another important step is to reduce your overall debt. If possible, pay off existing credit card balances and loans. Avoid applying for too much credit within a short period of time, as this can lower your credit score. Keeping your credit utilisation low, i.e. using less than 30% of your available credit, can also help. If you are struggling, consider seeking advice from a financial adviser or a debt charity.

What Are the Alternatives for Buyers with Adverse Credit?

If you cannot secure a traditional mortgage, alternative options may exist. One potential option is a guarantor mortgage. This involves a family member or close friend acting as a guarantor, meaning that they will contractually agree to cover your payments if you cannot meet them on a timely basis. Guarantor mortgages can help you secure a loan even if your credit history is poor.

Another option is shared ownership, where you can buy a portion of the property initially, pay rent on the remaining share and buy more shares of the property, over time. This reduces the amount you need to borrow and can make homeownership possible in steps.

How Can Sellers with Adverse Credit Protect Their Finances?

If you are selling your home and have adverse credit, it is important to manage your finances carefully. Work with your mortgage lender to ensure that all payments are up to date. Falling behind on payments can lead to repossession, which may complicate the sale and reduce the property’s value.

Consider consulting a financial adviser or solicitor for guidance on managing your debts. Selling your property could provide the funds needed to pay off outstanding debts and improve your credit situation. Planning ahead and acting quickly can help prevent further financial issues. Taking such steps can also help you move forward with a relatively clean financial slate.

FAQs

Q. How can I check if I have adverse credit?
A. You can check your credit report through agencies such as Experian, Equifax or TransUnion. Reviewing your report helps you identify any negative marks or errors.

Q. Can I get a mortgage if I have been bankrupt?
A. This is possible but depends on how long ago the bankruptcy occurred. Many lenders require several years to pass after bankruptcy before considering a mortgage application.

Q. How long does adverse credit stay on my credit report?
A. Most adverse credit issues, including missed payments and CCJs, stay on your credit report for six years.

Q. Are there mortgages specifically designed for people with adverse credit?

A. Specialist lenders offer bad credit mortgages. These mortgages are designed for people with poor credit histories but often come with higher costs.

Q. Will adverse credit affect my ability to sell my home?

A. Adverse credit does not stop you from selling your home. However, it may complicate the process if you have outstanding repossession proceedings.

Q. How can I improve my chances of getting a mortgage with adverse credit?
A. Save for a larger deposit, reduce existing debts and make all due payments on time. Working with a specialist mortgage broker might also help.

Q. What should I do if I am struggling to pay my mortgage?
A. Contact your lender immediately to discuss your options. They may offer payment holidays or other solutions to help you manage your payments.

Q. Can I rebuild my credit score while owning a home?
A. Making regular and timely mortgage payments and managing other debts responsibly can help rebuild your credit score over time.

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What is Adverse Credit and how does it impact getting a mortgage? | Tembo Money | Published Apr 24