Can a first-time buyer with bad credit get a mortgage?

If you’re a first-time buyer but keep getting your mortgage rejected, something’s wrong.

If you’ve saved a deposit but keep hitting the same brick wall, it’s probably your credit history that’s lacking.

Let’s get to the bottom of your problem; learn:

• What types of bad credit can hamper your mortgage efforts
• Why you might need a bigger deposit
• How demand for bad credit mortgages has risen…
• …and how lenders are meeting that demand
• Why a low credit score and ‘bad credit’ aren’t the same
• Why you should ALWAYS get a copy of your credit report

You’ve never bought a home before, but you want to buy one now. The only problem is, you’ve got bad credit. The question is: can you still get a mortgage?

The fact that you’re a first-time buyer shouldn’t be the main problem. This only becomes an issue if you:

• haven’t yet established a credit history
• have only a small deposit, or
• have limited disposable income

If lenders have rejected you but you’ve satisfied all of the above, you may have credit score issues. But, don’t panic. That’s far from the end of your mortgage journey.

We’ve secured mortgages for a wide range of homebuyers with varying credit histories. This includes people with missed payments, defaults, and even CCJs.

Your eventual suitability for a mortgage loan will depend on the type of adverse credit you have. But, rest assured, you’re not on your own.

The demand for mortgages for people with poor credit is high

As the fallout from the cost-of-living crisis intensifies, demand for bad credit mortgages is high. Indeed, more lenders than ever seem to be improving lending criteria for people with adverse credit.

So, in theory, yes: you can get a mortgage.

That said, the number of lenders amenable to your situation will depend on:

• The type of bad credit you have
• The fact that you might be young and have yet to build up a credit history
• How much you owe (including your current debt vs your credit limit)
• How long you’ve had bad credit issues
• How much deposit you’ve saved (if your credit issues make you higher risk)
• What you’re doing to address outstanding debts/credit issues

Let’s explore how we can help you get onto the property ladder despite any credit issues you may have.

Why do people with credit issues need a bigger deposit?

Typical mortgages often require deposits of 10% or even 5%. And if your credit issue is older and not severe, a lender may offer you a mortgage with these lower deposits.

But if your credit issue is more recent and involves a significant amount, you may have to find a larger deposit. That’s because you represent a greater risk to a lender.

The lender wants to be sure that it can recoup its outlay (the mortgage) with any borrower. It’s when the closer that outlay represents the whole property value that they look at ways to cover themselves.

If you’ve only put down a small deposit, it’s less likely they will be able to get their money back, even if they repossess it. If you’ve had serious credit issues, the lender is likely to ask for at least 20% deposit, possibly more.

Getting your first mortgage

Everyone’s first mortgage is daunting. At times, it will feel like you’re under intense scrutiny. And, let’s make no bones about it: you are. Or, at least your financial situation is.

That’s because lenders have strict guidelines to which they must adhere when lending money. Those guidelines are particularly strict for something as big as a mortgage. They’re tighter still when the borrower has impaired credit.

So, strap in. At times, you will think, “What do they want to know all that for?”

Don’t worry. It’s all part of the homebuying process. Rest assured: our experienced brokers will treat everything you tell us in the strictest confidence.

Mortgages for first-time buyers with impaired credit

If anything’s preventing you from getting a mortgage, it’s probably your credit score. It’s unlikely that your status as a first-time buyer is the issue. That’s where we can help.

First, though, regardless of the problem, stop applying to one lender after another. Numerous failed searches on your credit file will make it even harder for you to get a mortgage.

With impaired credit, your choice of lenders is already limited. What we need to know is the type of credit issue you have and its severity. This will help our brokers instinctively know which lenders’ criteria most suit your situation.

Here’s a quick overview of the types of credit issues and their respective definitions:

Late/missed payments

Life is full of credit agreements, these days. Everything from our Smartphones to domestic appliances, cars to store cards, we pay for them on credit. They’re so commonplace that almost everyone has them.

So, what technically is a late/missed payment? It’s a scheduled payment to a service provider/creditor made after the payment due date (or grace period) has passed.

In the run-up to your mortgage, the simple answer is: don’t miss these payments. If you can’t pay a store card instalment, how will you cope with repaying your mortgage?

3-pay or ‘pay in instalments’ service providers

Klarna, PayPal, Zilch, and Clearpay (Afterpay) offer pay-later or pay-in-instalment credit services. These firms’ transactions have typically appeared on our credit histories since mid-2022. If you miss an instalment, it will appear on your credit history. So, don’t.

Pay-day loans

Many creditors provide payday loans in the UK today. They typically offer high-cost, short-term loans, payable on ‘payday’ or a set date in the near future.

Lending Stream and Cashfloat are the two leading direct lenders in this space. But whoever your payday loan is with, ensure you pay it in full on (or before) its due date. Better still, try to avoid them altogether.

Defaults

Defaults usually appear on your credit report after you’ve missed several monthly payments as per the schedule of a credit agreement.

Lenders/creditors typically allow a grace period of three to six months before issuing a formal default notice. If payment or an arrangement to pay isn’t made beyond the specified grace period, a default is registered on your credit file. It typically remains in place for six years from the date of registration.

Debt Management Plans (DMPs)

Debt Management Plans (DMPs) are informal arrangements with a debt advice organisation. The organisation helps you create a budget to make one affordable monthly payment to them, usually immediately after payday. They then distribute the amount you’ve paid them to your creditors.

DMPs typically cover non-priority debts, such as store cards, personal loans, utilities, and unsecured overdrafts. However, entrants into such agreements should maintain the agreement despite its informal nature.

CCJs

A County Court Judgment (CCJ) shows that you owe money to a creditor after they have successfully sued you. They are a severe legal judgment against you for failing to repay a debt.

The best-case scenario: they cause significant long-term (up to six years) financial damage to your credit score. Worst-case scenario: they potentially lead to bailiffs taking your goods to pay off some or all of the outstanding debt.

CCJs can make it difficult to obtain any credit, including mortgages or to rent property. The best way to mitigate their effects is to pay the debt in full within 30 days of receiving the judgment (CCJ cancellation). If that’s unfeasible, any mortgage offer will reflect the severity and age of the CCJ. This could mean higher interest rates and the need to find a bigger deposit.

Individual Voluntary Arrangements (IVAs)

An Individual Voluntary Arrangement (IVA) is a formal, legally binding agreement between a debtor and their creditors. The agreement outlines a plan to repay all or some of the debt over a set period.

The schedule is typically five to six years long and is made through regular payments to an Insolvency Practitioner (IP). Regardless of the schedule’s duration, the IVA remains on file for six years. During this period, it can be difficult for the debtor to obtain any other line of credit.

While the IVA is active, the debtor needs written permission from their Insolvency Practitioner (IP) to borrow more than £500. As such, anyone with an IVA must be prepared to factor in additional time and steps in their mortgage timeline.

Bankruptcy

Filing for bankruptcy immediately affects your credit score. How low your score drops will depend on what your score was at the time you filed for bankruptcy.

Like other forms of serious debt repayment issues, it will remain on your credit history for six years. The more recent the entry, the lower the likelihood of securing credit or even obtaining a rental tenancy.

Underwriters will want to see a distinct change in your circumstances before considering you for a mortgage. Even then, expect to have to find a bigger-than-usual deposit and to initially pay higher-than-average interest rates.

Next steps

If you have any of the above credit issues, disclose them to our broker upfront and immediately. It’s not a great way to start your relationship. But, being candid from the outset is the best and only way forward.

Approaching a lender that’s not accommodating could cause even more damage to your credit history. The last thing you want is a ‘failed’ search on your file. This will only raise a red flag with underwriters, which you can ill afford.

How to improve your credit history to make it mortgage worthy

There are several ways to improve your score, even with these adversities against you. The more you can exhibit an eagerness to up your score, the kindlier an underwriter will regard your application.

That said, you can’t hope to improve your score if you don’t have a copy of your credit report.

Most lenders use Experian, Equifax, TransUnion, or a mix of the three. We recommend CheckMyFile. It consolidates all the information into a single report. That way, you’re fully armed and can start addressing any issue a lender might find.

But there’s much more to being mortgage worthy than considering what’s on your credit file. Find everything you need to know in our dedicated guide: improving your credit score. To get a basic overview, here’s a list of your main ‘do and don’t’ priorities:

Actions you should take: the cure

Enacting these will set you in the best possible stead ahead of your mortgage application:

• Get a copy of at least one of your credit reports, if not all three
• Actively monitor your credit score once you’ve taken any/all of the following actions
• Check your entry on the Electoral Register
• Make sure that your utilities, bank accounts and credit cards are registered to your current address (and that your name appears on the bills/statements)
• Remove any previous, extinguished financial associations (old joint bank accounts, etc.)
• Complete the payment of all existing financial commitments on time and for the full designated amounts
• If you can settle any outstanding debt, especially entries on your credit report, do it
• Build up cash in your bank accounts to lower your cash-to-credit-limit ratio

Actions you shouldn’t take: prevention

Engaging in any of these financial activities may negatively impact your credit score:

• Don’t apply for a mortgage until you’ve seen your credit report, understood the issues, and begun to address them
• Restrict further spending on your credit facilities (overdraft, credit cards, store cards, etc.) to only the absolute necessities
• Try not to commit yourself to any major purchases (think: deposit!), especially not on credit

The rise in popularity of JBSP mortgages

For young people, especially first-time buyers, saving for a deposit can be hard. To address that, many of our lenders have added Joint Borrower/Sole Proprietor mortgages to their range.

As the name suggests, these mortgages allow a person (the sole proprietor) to buy a home, but share the responsibility of repaying the loan. That sole proprietor piggybacks on the income and creditworthiness of the other applicants, usually family members.

Many first-time buyers use JBSPs as a way of accessing the property ladder. They remain the sole legal owners of the property as long as the mortgage is in place.

When they’re ready at some point in the future, they can unwind the JBSP mortgage. By this time, they will hopefully have established a credit history that enables them to secure a competitive mortgage on their own terms.

A guarantor mortgage provides a similar safeguard. The guarantor(s) are, again, usually family members. They guarantee the lender that they will cover any shortfall in the homeowner’s ability to repay the mortgage.