Most people need to borrow money at one time or another. Buying a home is a prime example of when borrowing money from a lender is essential. After all, unless you are fabulously wealthy or the holder of a winning lottery ticket, you probably won’t be a cash buyer.
Ordinarily, as long as you have a large enough deposit and a reasonable income, it isn’t too difficult to find a lender willing to approve a mortgage application. There is a lot of form filling to deal with and plenty of red tape, but the process is not insurmountable if you are patient. The problems usually arise when you have a poor credit rating.
Why Lenders Look at Credit Ratings
Borrowing money to buy a home is a huge financial commitment. Lenders need to know that you can afford to take out a mortgage, so they look at your borrowing history and credit record to determine what type of borrower you are. If you have always made loan and credit card repayments on time, don’t have any CCJs against your name, and are not up to your eyeballs in debt, you shouldn’t have a problem finding a high street lender willing to discuss mortgage offers. If, on the other hand, you have defaulted on loans in the past, your name is linked to CCJs, and your credit rating is poor, it will be a very different story.
Credit Scores and Interest Rates
Lenders use a credit score to help them decide how much they are willing to lend (if anything) and what interest rate to charge. Mr and Mrs Average, who have an excellent credit score, will be offered the best headline interest rates, whereas Mr and Mrs CCJ will quickly find that only a few specialist lenders offering bad credit mortgages are happy to open their doors for a mortgage chat.
All Is Not Lost
There are a few things you can do if you need a mortgage but your credit rating is less than stellar. Firstly, it is worth checking your credit report to see whether there are any errors on there. Mistakes are rare, but they do sometimes happen. If you do spot any errors, contact the agency to have your record amended.
Secondly, the more you borrow, the harder it will be to persuade a lender to overlook your poor credit history. Lenders are more cautious with borrowers who need 95% of the purchase price compared to someone with a 50% deposit. The larger the deposit, the easier it will be to find a lender willing to do business.
Use a Specialist Lender
If you are still having problems finding a lender to give you a mortgage, consider using a guarantor, i.e. a family member or trusted friend who is willing to guarantee repayments on the loan. The downside for them is that they will have to repay the debt if you default on the mortgage.
For people with a bad credit rating, a specialist lender is the best place to go for a mortgage. They will be more understanding and less likely to slam the door in your face.