Every working adult dreams of the day of paying for something in one fell swoop using cash, but the reality is most people don’t have the funds to purchase bigger investments in one lump sum. Reaching a milestone such as preparing for homeownership, for example, is an expensive, life-changing move that requires thousands of dollars. But thanks to lenders that provide mortgages for people strapped for cash, settling down in your dream home isn’t limited to the affluent.
Mortgages make it possible for people to borrow money, but it’s not as simple as applying for a loan from any lender near you. Lenders need some form of security after granting you money, so the most important factor every lender in town will focus on is your credit score.
Why Is Credit Score Important?
A good credit score is a benchmark that determines whether you’re financially sound to handle a credit card or a loan. But beyond being a metric for lenders to assess your risk level as a borrower, your credit score is a reflection of your financial responsibility and history. Because of this, it can influence your ability to secure great deals on loans, credit cards, insurance premiums, cell phone plans, apartments, and more.
Different Credit Score Ranges
Different types of lenders review your credit score and judge your financial wellness and capabilities based on the following scoring system following UK’s three heaviest-hitting Credit Rating Agencies (CRAs):
As you can see, different CRAs don’t have a blanket rule for determining the credit score. Nonetheless, your credit score ensures mortgage lenders that you won’t default on your monthly payments. With that in mind, what happens next if you need to get mortgage financing with a less-than-ideal credit score?
What Is a Bad Credit Score?
Contrary to popular belief, having a poor credit score doesn’t automatically disqualify you from getting a mortgage. However, the lower your score, the harder it is to secure a bang for the buck deal to underwriting your loan.
Remember that while a mortgage can ease your financial burden currently, it’s still essential to get a loan that you can afford to pay back for years to come. That’s why people strive to improve their credit scores so they can obtain a mortgage with a lower interest rate, allowing them to save a hefty sum of money over time.
Not to mention, a bad credit score can make it harder to get credit approval or a good loan term. Nonetheless, you can still get a mortgage even with a bad credit score by seeking aid from specialist providers who will consider poor credit applicants. Naturally, the rates and payments offered will not be as ideal compared to customers with an impressive credit history.
How to Apply for a Loan from a Bad Credit Mortgage Broker
Step #1: Gather Your Credit Reports
Collecting your credit reports can give you an overview of the possible mortgage providers who might be willing to lend you money despite having a poor financial history. But more importantly, you might detect any errors in your report that can help improve your credit score!
Step #2: Increase Your Deposit
Once you’re ready to apply for a bad credit mortgage, the next best move is to put down as much deposit as you can initially so you can counterbalance the risk that is often associated with these kinds of deals. Deposits typically range between 5 to 10 per cent, but bad-credit mortgages cost a whopping 15 to 85 per cent more!
Step #3: Work with a Whole-of-Market Broker
Shopping around for different lenders and sending multiple applications can hurt your credit score too, so working with a broker can help narrow your options and lead you to the best mortgage deals that are right for you.
What Are the Pros and Cons of a Bad Credit Loan?
Poor credit borrowers still have plenty of lenders to approach, and while every mortgage option offered by bad credit lenders allows everyone the chance to ease their financial burden, it’s still important to consider how it can impact your financial situation in the long run.
For one, bad credit loans naturally come with higher interest on home loans. Seeing as you’re a risk to lenders, they may also request collateral, which can put greater pressure on you as a borrower.
On the flip side, getting a bad credit loan guarantees faster processing times, lower interest on credit cards, and longer repayment term length. If you manage to pay religiously, completing a bad credit loan can also lift your credit score significantly!
Improving Other Aspects of Your Financial Wellness
If you don’t have a good credit score, some lenders may improve their perception of adverse credit customers by looking into the following factors:
It’s also better to improve your credit score, but this is a topic on its own! Generally, the quickest ways to repair your credit score is to pay off any credit card debts in full on a timely basis, lower your credit utilisation ratio, regularly monitor your credit reports, and avoid opening unnecessary credit accounts. Keep in mind that in the wake of the pandemic, many lenders now loosened their standards, particularly in the length of time you have as a financially secure borrower.
So long as you have a financially secure position with your income for at least 12 months, you can improve your impression in the eyes of lenders.
The Bottom Line: The Role of Your Credit Score in Your Financial Commitments
Maintaining a good credit score can be tricky, especially when life’s challenges can often bring hard-working people strapped for cash due to unexpected events. Despite the challenges that come with keeping a financially healthy habit, it’s worth the effort to improve your credit score and stay patient along the way.
After all, the benefits you get with a good credit score outweigh the legwork you have to put in to increase your financial standing. The good news is that, as shown in the table above, lenders can use different criteria when assessing your credit score, plus there will always be a mortgage designed to cater to borrowers no matter how low their credit score goes.
Why Choose Us for the Best Value for Conveyancing?
If you’re looking for something that can help take the guesswork out of the home buying process, our expert team of SRA-regulated and licensed conveyance solicitors in Birmingham, UK, can simplify the experience for you. Get in touch with us at 0330 043 1202 to get instant conveyancing quotes.