Getting a mortgage with bad credit

Adverse credit does not automatically stop you getting a mortgage, but it narrows the market and usually costs you money. Entries stay on your credit file for six years from the date of the default, judgment, bankruptcy or IVA registration, and your options generally improve the older that entry gets and the larger your deposit is. Specialist lenders exist for most situations. They price higher and expect more deposit, and no broker can promise approval.

Lenders are not looking at a single score. They read the entries on your file and judge each one on type, size, age and whether it has been settled.

Roughly in order of how seriously lenders tend to treat them, the list runs from missed payments and arrears, through defaults and county court judgments, to debt management plans, individual voluntary arrangements, bankruptcy and repossession. Payday loan use is a separate concern for some lenders even where every loan was repaid on time.

There is also the quieter stuff that is not really adverse credit but behaves like it. Regular unarranged overdraft use, a string of gambling transactions on your statements, or a current account that runs to zero every month can all cause an underwriter to decline a file that looks fine on the credit report itself.

The single most useful thing to know is that time does most of the work. A default registered five and a half years ago will drop off your file in six months, and until it does, most lenders will treat it far more leniently than one registered last year.

As a rough shape of the market, mainstream lenders are often comfortable once adverse is three years old or more and was minor. Between one and three years old, you are usually in specialist territory but with reasonable choice. Inside 12 months, the choice narrows sharply and pricing rises. Very recent or unsatisfied entries, particularly larger ones, may mean waiting is the better plan.

Severity matters alongside age. Three missed mobile phone payments two years ago is a different conversation from a 9,000 default on a mortgage two years ago. Lenders weigh secured arrears, meaning missed mortgage or secured loan payments, more heavily than anything else, because it goes directly to the risk they are taking.

A missed payment is a marker on an account that is still live. One or two on a credit card, more than a year ago, are often ignored by mainstream lenders. A pattern of them across several accounts is read as a cashflow problem.

A default means the lender considered the relationship broken and closed the account. It stays for six years from the default date, not from when you paid it. Satisfying a default does not remove it, it just shows as satisfied, which lenders prefer to see.

A county court judgment is a court order to pay. Like a default it stays on file for six years from the judgment date, and a satisfied CCJ still shows for that full six years. Pay it if you can, because most lenders treat satisfied CCJs far more favourably than unsatisfied ones, and many will not consider an unsatisfied judgment at all. If a CCJ is paid within one month of judgment it can normally be removed from the register entirely, which is worth knowing if one has just landed.

A debt management plan is an informal arrangement. It does not appear on your file as a single entry, but the defaults and arrears behind it usually do. Lenders will generally want it settled, and often want it settled for some time, before considering you.

An individual voluntary arrangement is a formal insolvency arrangement, usually running five or six years. It stays on your file for six years from registration, which for many people means it is still showing shortly after the arrangement finishes. Some specialist lenders will consider applicants with a discharged IVA, typically wanting it satisfied and a meaningful deposit.

Bankruptcy also shows for six years from the date it was registered. Discharge normally comes after 12 months, but the file entry outlasts it by years. A small number of lenders will look at applicants a few years after discharge with a substantial deposit. Fewer will look at anyone still undischarged.

Repossession is the hardest of the lot, because it is direct evidence of a lender losing money on a mortgage. Options exist, but they are limited, expensive, and usually require both age and a large deposit.

Deposit does two things. It reduces the lender's exposure if things go wrong, and it demonstrates that your finances have stabilised.

With clean credit you might be looking at a 5 or 10 per cent deposit. With recent or moderate adverse, specialist and adverse lenders often want 15 to 25 per cent. With severe or very recent adverse, more again. Every extra five per cent of deposit typically opens more lenders and improves the rate you are offered.

Adverse lending is priced for risk. To show the scale of it, here is an illustration using assumed rates rather than any current market rate.

Take a 200,000 repayment mortgage over 25 years. At an illustrative 4.5 per cent the monthly payment is around 1,112. At an illustrative 6.5 per cent it is around 1,350. That is roughly 238 a month more, or about 2,860 a year.

The point is not the exact numbers, which will differ from whatever is available when you apply. The point is that the premium is real and worth planning around. Many people on adverse products take a two year fixed rate, use those two years to keep every payment on time, and then remortgage onto mainstream pricing once the adverse has aged further. Build the exit into the plan from the start, and check the early repayment charge so the exit is not blocked.

• Get your reports from more than one credit reference agency, because they do not all hold the same data
• Check every entry and dispute anything genuinely wrong, including default dates recorded later than they should be
• Register on the electoral roll at your current address
• Keep every credit commitment paid on time from now on, since recent conduct carries the most weight
• Reduce credit card balances well below their limits rather than closing the accounts
• Avoid new credit applications, particularly short term high cost credit, in the 6 to 12 months before applying
• Keep your current account clean, with no unarranged overdraft use and no returned direct debits

Sometimes the honest advice is not yet. If your worst entry drops off in eight months, waiting those eight months may move you from a specialist rate to a mainstream one and save you more than the delay costs. If you have an unsatisfied CCJ you could clear, clearing it first usually opens more doors than applying around it.

Against that, waiting has costs too, including rent paid and the risk that prices move. It is a judgement call, and it is easier to make once someone has told you honestly which lenders would look at you today and which would look at you next spring.

A broker who works with adverse credit regularly can tell you both, and can approach lenders who never appear on comparison sites. The MortgageMatch directory is a straightforward way to find an FCA-authorised broker to have that conversation with.