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Defaults
It is widely regarded that you will find it impossible to obtain a mortgage if you have a default on your credit file. This is not entirely correct, It is certainly not straightforward but it is achievable. It will be dependent upon a number of factors such as when the default was registered, how much it was for, how many defaults you have and finding the right lender to approach. In this article, we will explain how using a bad credit broker will help your application process and could be the key to being approved for a mortgage.
What is a default?
A default occurs when you’ve missed a consecutive number of payments to a creditor. These can include credit cards, personal loans, mobile phone providers, utility companies and mortgage lenders. It may also occur if you don’t pay the full monthly amount owed to the creditor, even if this has been arranged with them.
How will this look on my credit report?
Normally, monthly payments are marked on your credit file and given a number. If all payments are up to date, then that month will show as a zero. One missed payment will equal a status 1, two missed payments will equal a status 2 and so on. Once a credit agreement hits a status 3 or worse, a creditor can close your account as you have not kept up with your contractual agreement. This will invariably result in a default showing on your credit file.
How long will a default last for?
Defaults will sit on your credit file for six years, even if you have paid them off in full.
Can I get a mortgage with a default?
Yes, is the simple answer but it will make the process a bit more difficult.
Mortgage lenders look at a number of factors when considering an application and a person’s credit history is one of them. Some lenders are quite rigid when it comes to ‘bad credit’ and will refuse all but the smallest of credit mishaps. Other lenders will want more information on how the defaults came about before making a decision and there are lenders out there who will approve an application if other lending factors make sense to the overall case.
Using a broker who has the knowledge and experience of dealing with credit issues such as defaults and then knowing which lenders to approach is the key to this.
How old do my defaults need to be?
The longer ago defaults were registered, the better it will look.
A few lenders will consider an application as long as the default is over six months old. More lenders open up if they were registered two or three years ago and more lenders again the closer the default is to dropping off your credit report altogether.
Do my defaults need to be repaid?
There are lenders who will only consider an application if the default has been ‘satisfied’ on your credit report or you commit ensuring that they are satisfied by the time an application goes in or by the time a mortgage offer is produced. Other factors will come into play that could vary the above information such as the age of the defaults, the value of the defaults and the amount of deposit that you may have to put toward the deal. We will cover off these factors further into this article.
What if I have multiple defaults?
Mortgage lenders will also look into this and it will affect their decision making process. Usually, one or two defaults would not be a deal breaker as long as they are of a similar age. Multiple defaults however will cause concern as this could show that there is a pattern to a person not paying their credit agreements. These issues could have been caused by a ‘lifetime event’ in which case lenders may look more favourably on your situation as there are circumstances to support their decision. In any case a mortgage lender would certainly want to know a little more about the circumstances surrounding the defaults and this is called a manual underwriting process. Again, the age and size of the defaults will have an impact.
What about the value of my defaults?
The value of a default will definitely impact a lenders decision when assessing an application. Some lenders will not accept an application if there is a default for over £250. Others will be more lenient and assess if the default is less than £500. There are lenders who will consider an application if you have multiple defaults, the defaults do not add up to more than £2500 in total but they will need to be two years older or more. The list goes on and this is where a bad credit broker comes into their own. They will know which lenders to approach based on your own individual circumstances.
What size deposit will I need with a default?
It could be as low as 5%. It could be as high as 20%.
The devil is in the detail. The amount of deposit needed will depend upon the age of your default, whether there are multiple defaults, how large in value the defaults are, whether a default has been repaid and whether there are any other credit issues or general mortgage criteria issues that the lender faces when considering an application.
A lot of lenders have a sliding scale of what deposit may be needed depending upon your circumstances and will lend from 95% down to 80%. Others will only start at 80% because they are prepared to accept more credit issues within their lending proposal.
SOLE TRADERS 1 YEAR ACCOUNTS
So, what if you do not have a full two years accounts submitted to HMRC and you want to move forward with a mortgage application? This will make things harder but not impossible. Lenders want to assess how stable a business looks if they are using the income from that business as one of the main factors in their decision making when looking at an application. The more years of accounts that they have to look at, the better it will guide them in their overall assessment. Ultimately, a lender wants their money repaid to them and will always be mindful of the risk involved, because of this most lenders will demand that they have a minimum two years of accounts but there are lenders who will consider a mortgage application with just one year’s accounts as evidence. This could also lead to a slightly higher interest rate and/or a slightly higher deposit to mitigate the extra risk taken during the underwriting process. A lender may be more comfortable if an individual is moving into a like for like role. If someone who was previously a builder in an employed role wanted to start their own building company and has one year’s accounts available as a sole trader, this will look better in the eyes of the lender as the transition from employed to self-employed makes perfect sense. As mentioned above, there are a number of lenders who will consider one-year account applications but you will need guidance from a Mortgage Expert who excels in this field.
As a mortgage is secured against your property, it could be repossessed if you do not keep up mortgage repayments.