bad-credit-and-large-deposits

Bad credit and large deposits

Find out how a large deposit can help lower the risk for your mortgage lender and whether this is enough to get approved on a mortgage.

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Can I get a mortgage with bad credit if I have a large deposit?

Yes. That’s the pleasing short answer.

Successfully applying for a mortgage is all about risk. The mortgage lender knows that they will make profit (in terms of interest) on their investment in you, as long as you will pay back the loan or – if you don’t – that they will be able to sell the property following a repossession and be sure to have not lost out in the process.

If it feels coldly business-like, that’s because it is. If you have bad credit, then you become more of a risk to the lender and you need to do something to prove your stability – a larger deposit is part of that.

How large is large – what is the average deposit?

If you have good credit, then a 10% deposit will be all you probably need. It’s 10% of your prospective new house’s market value, so if you are looking to buy something worth £280,000, you’ll need to save up £28,000.

If you have a poor credit score, then you will be looking at 20% or 30% deposits – or sometimes even larger. On that same house, that would mean £56,000 (20%) or even £84,000 (30%).

Why does having a larger deposit help?

Having a larger deposit means you are showing your own personal investment in the property, plus you are making the value of the property compared to the size of the loan ratio much smaller. Both have an impact on your risk assessment.

Understanding loan to value (LTV)

The final recourse for a mortgage lender is to repossess and sell your house to recoup their money. It’s not something they like to do, but it represents the bottom line for them if you were to fail to repay their money.

Selling your house is unlikely to net them the full market value. They are not going to put in the same level of effort that you might when selling it (no smell of freshly baked bread and perfectly arranged flowers for visitors) and are looking for a quick sale. On a £280,000 home, for example, the mortgage company might only get £250,000, and once their administration costs and other expenses are accounted for, that figure drops further.

If the mortgage represented 100% of the house (i.e. you had no deposit and they had leant you £280,000) and you defaulted in the first few months after paying £1000 per month, they will have made a loss with their investment. This would be the case if the loan to value ratio (LTV) was 100%.

With a 10% deposit (£28,000), the LTV would be 90% and they would scrape by with perhaps a minor loss depending on the cost of their administration.

A 20% deposit (LTV 80%), would mean that on repossession and sale, the lender still makes some money. In this case, they’d have provided £224,000 and would claim back £250,000.

The higher the LTV, the greater the risk for the mortgage lender.

Lowering LTV with a significant deposit

By providing a larger deposit, you lower LTV and thus risk. If they find themselves having to ultimately repossess the house, it is not a financial loss for them. Of course, LTV is not the only factor. The value of your house over time could go down, or damage could occur which lowers its final sale price. The mortgage company do their best to mitigate these risk factors before agreeing to lend you the money.

Can I get a mortgage with bad credit and no deposit?

No. This time the short answer is not so pleasing – but there are options.

It makes no sense for a mortgage lender to provide someone with bad credit and no deposit a mortgage. The risk is very high, and the relative rewards are very low.

However, you may be able to ask someone else to guarantee your mortgage for you. Having a guarantor means that someone else (typically a parent) is backing you up, saying that they are willing to make payments on your mortgage if you cannot. The mortgage is still in your name, but they are also ultimately responsible to pay for it.

Being a guarantor is a serious financial decision for anyone you ask, so it is important that if you do go down this route, you do so honestly and willing to accept a ‘no’ from whomever you are asking. They may be putting their own home at risk in supporting you and have the same fear of you letting them down as the mortgage lender.

Asking someone to guarantee your mortgage may put strain on your relationship and you should consider alternatives (such as renting while you repair your credit status) before doing so.

Is all bad credit the same?

No. Not all credit report activity has the same impact with a mortgage lender. Most lenders look at adverse credit activity in three categories: very severe, severe and non-severe. They also consider how long ago these issues occurred and will put less weight on older problems that have been resolved, than outstanding recent negative activity.

Non-severe credit blackspots

The following list represents credit issues which can usually easily be smoothed over or ignored entirely and typically call for a deposit in the 10% to 15% range:

– Late payments
– Low credit score
– New credit score (young borrower)

Severe credit blackspots

These issues will be questioned upon by the lender. They could make some lenders decide to simply decline your mortgage application and will make others ask for a more significant deposit from 15% to 30%. Again, a longer length of time passed since these issues were resolved will help, while outstanding problems will be considered more significant.

– Previously missed mortgage payments
– Defaulting on payments
– County court judgements (CCJs)
– Debt management schemes
– Individual voluntary arrangements (IVAs)

Very severe credit blackspots

These are the situations which will have many lenders reject your application outright, and others discuss your application at depth. In all cases you will be expected to front a significant deposit to make the LTV appealing to the lender. Deposits will be 30% to 40% and in some cases, even higher.

– Bankruptcy
– Previous repossession
– Multiple other severe problems

Can I borrow a deposit?

Maybe. Lenders will want to see where the money has come from, expecting it to be a gift from family, savings or equity in a property. There are some lenders who will be willing to accept a loan for your deposit, however this will be considered when looking at your affordability and will affect that aspect of your application.

Understanding affordability

Affordability is a measure of how easily you can make repayments on your mortgage. If you have a high income and low outgoings then you have a strong affordability score, but if you are always scraping by each month and pushing your available credit to the limit, then you have a low affordability.

Mortgage lenders consider affordability to be a key factor in determining whether to approve your mortgage application.

If you have personal loans, credit card debt, stretched overdrafts or simply a lot of bills and regular monthly outgoings, then you are unlikely to have the kind of affordability score that will make you a promising investment for the lender.

Taking out a personal loan to use as a deposit is a sure sign of poor affordability. That doesn’t mean that it will automatically result in a mortgage application rejection, but it isn’t going to help.

It’s far better that you take the time needed to save up your deposit and pay off any other debts in order to present yourself with a strong affordability score.

Can a high deposit offset poor
affordability?

Yes, if done the right way.

If you have savings that are significant enough to present a larger deposit and your general affordability comes from a busy life rather than a large level of outstanding debt, then providing a larger deposit will lower the size of your required mortgage which will, in turn, lower the size of your monthly repayments and improve overall affordability.

It is not perhaps as good as having more cleared funds at the end of every month, but it will help.

However, it is not usually worth using other credit to increase the deposit at the loss of a strong affordability score – both factors will be properly analysed by the mortgage lender and the off-putting nature of a brand-new unsecured loan will be significant!

Getting a bad credit / high deposit mortgage with UK Mortgage Finder

At UK Mortgage Finder we work with a huge range of lenders to find the perfect mortgage to suit your finances. We can advise on your options, from how much deposit might be suitable through to ways to improve your affordability score – plus we know which lender is more likely to see past some of the poor credit on your report. We can find the mortgage for you! Give us a call today or fill in our contact form to have one of our expert team call you back.

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