A bad credit score can make it difficult for you to get loans, credit cards and mortgages.
As a first-time home buyer, you already have to deal with high real estate prices, so if you have bad credit, buying a home can seem like an impossible dream.
However, a small number of mortgage providers will still lend you money to buy a property even if you have bad credit.
But it’s likely that you’ll end up paying a higher interest rate than those with impeccable credit records.
That means it might be worth waiting to move up the ladder until you’ve improved your score – because then you’ll pay lower interest so your monthly repayments are smaller and more affordable.
Whatever you decide, it’s good to know that there are options.
Paula Cook, Mortgage Broker at Paula Cook Mortgage Broker LTD, says there are six things you should do if you’re saving up to buy a home but have bad credit.
Check your credit report
If you have bad credit, the best thing to do first is just find out what your score is, Paula said.
“If you know your credit score, it shows lenders a sense of financial responsibility.”
And that will leave you in a better position to opt for a mortgage that’s right for you because some lenders will turn you down if your rating is poor, she said.
“If you know what’s on your report, you can look at the lenders criteria,” she said.
“If you’ve had two big defaults, a lot of high street lenders won’t touch you.”
If you find yourself in a situation where you’re having trouble finding a lender, Paula said Aldermore, Pepper Money Mortgages and Together Mortgages are three lenders to consider.
She also recommended using a specialist broker.
We’ve previously reported how a TikToker revealed mortgage brokers help you figure out your financial situation, highlight any schemes, and find the best mortgage deals.
Remember to research a set of brokers in the market, so they can compare ALL offers in the market.
Check how they will be paid and make sure you are happy with it.
To check your credit score, Paula recommended checkmyfile.comwhich collects data from four credit reference agencies, not just one.
It’s currently free on a 30-day trial, but you have to start paying £14.99 per month after that point.
However, you can cancel your subscription at any time.
Pay your bills on time
It’s a quick way to make sure your credit score goes up and increases your chances of getting a mortgage, Paula said.
“It can have a huge impact, especially in the six months leading up to applying for a mortgage.
“Even low credit lenders won’t give you a loan if you’ve recently missed payments, so keep up to date and show that you’ve improved your money management skills.”
Paula also said the more recently you’ve missed payments or defaulted, the higher your interest rate on a mortgage is likely to be.
This is because if you are in default or have missed a credit payment, a potential mortgage lender will view you as a higher risk and raise their interest rate to protect themselves financially.
Save, save and keep saving
If you have defaults or a low credit rating on your bank accounts, you may need a larger deposit than usual.
This is because most mortgage lenders specializing in low credit scores expect a minimum deposit of 25%, so you will need to save more than someone with a higher credit score.
With property prices as high as they are, for some, a 25% down payment might be far too out of reach.
To combat this, Paula recommended saving, saving, and saving some more.
We previously reported on a pharmacist who saved £800 a month over two years so she could buy her first home while limiting her leisure budget.
Register on the electoral roll
Paula said one of the easiest and “easy wins” ways to increase your credit score is to register to vote.
Registration to vote can be done on the government website.
In England, you must be 16 or over to be able to vote. In Scotland and Wales, you must be 14 years old.
You must also be one of the following:
- a British citizen
- an Irish or EU citizen living in the UK
- a Commonwealth citizen who has permission to enter or stay in the UK, or who does not need permission
- a citizen of another country living in Scotland or Wales who has permission to enter or stay in the UK, or who does not need permission
Close old and inactive accounts
If you haven’t used a credit card in years and you don’t intend to use it again, shut it down, Paula said, because it will affect your score.
She said: “The more lines of credit you have open, the lower your credit score will be.”
Having too much credit available will reduce what lenders will give you.
Paula said that’s because whatever money you have in those accounts will be considered a bigger risk than if you didn’t have the account.
“If you have a low credit rating, lenders see that you can get into debt.
“So ideally you don’t want to have too many accounts, especially if you have accounts and don’t intend to use them.”
Before closing an account, check its impact on your score. Sometimes this can have a positive impact on your credit history.
Reduce your expenses
Paula said to show lenders that you can manage your credit by reducing your expenses in the last six months before applying for a mortgage.
“That means no large impulse purchases,” she said.
“You want a lender to see that you can manage your money and that you’ll pay off your mortgage on time.
“Showing that you’re splurging and have excess cash won’t look good when lenders look at your bank statements.”
We’ve already revealed other ways to help you get a mortgage if you have bad credit.
And we spoke to a business analyst who fixed his bad credit rating in two years.