Will a payment default stop me from getting a mortgage?

In recent years, we’ve seen more contractors than ever run up defaults.

Whilst the flexible workforce is our primary audience, this guide is for anyone with defaults about to apply for a mortgage. Learn:

• What a credit default is
• How lenders perceive defaults
• How a default affects your mortgage application
• How to correctly apply for a mortgage when you have a default
• Why you should ALWAYS get a copy of your credit report

Anyone can run up debt. Since the cost of living crises, many people have experienced some type of financial hardship. Even highly-paid contractors have run up the odd default or two.

Luckily for people with defaults, several lenders we use are sympathetic to their issues. A few are even amendable to homeowners who’ve defaulted on mortgage re-payments. That alone is a clear sign of a shift in attitude from mortgage providers.

In this article, we’ll look at all the connotations of having defaults on your credit file:

• What levels of bad debt will affect your chances of getting a mortgage
• How long defaults stay on your credit file
• What the effect of “satisfying” a default has on lenders’ perceptions
• What you can do to get a mortgage when you have defaults on file

First, let’s look at what a default actually is:

What is a default on my credit file?

It’s almost impossible to survive today without entering a credit agreement or three. They’re everywhere, from our mobile phone contracts to our mortgages.

Every time you enter into a new credit agreement, it will appear on your credit file. The repayments you make within those agreements form your credit history. You get a default recorded against you when you don’t fulfil that agreement.

And it’s so easy to do. For whatever reason, you stop repaying that debt, despite the creditor’s best appeals to you. Eventually, their patience runs out. Before you know it, they issue you a default notice. Bingo, you have a bump in your credit history.

How long before a creditor issues a default notice?

The period before the creditor issues the default notice depends on the terms of the original agreement. It could be three months, six months, or longer. But, usually, once they’ve issued notice, they’ll close your credit account.

It doesn’t end there. The creditor will look at other ways to get you to pay the account’s outstanding balance. This may or may not involve legal proceedings against you.

The default will then stay on your file for six years. This can affect your future chances of getting other types of credit. But it needn’t necessarily affect your chances of getting a mortgage.

Why does having a good credit rating matter?

All lenders use at least one credit agency to check your credit history when you apply for a mortgage. The state of your credit history will determine whether they approve your application or not.

A mortgage is a loan, a credit agreement, between you and the mortgage provider. It’s the biggest credit agreement most of us will ever enter into. If you have defaults, the lender will want to know about them.

Many High Street lenders have strict lending criteria surrounding defaults. But that doesn’t mean you can’t get a mortgage if you have them.

Specialist lenders tend to appraise mortgage applications on an ‘as is’ basis. They base each decision on each application’s merits.

But even specialist lenders check your credit file to assess three things:

• What outstanding debt you have
• Your history of repaying credit, including checking for defaults
• The probability that you’ll repay any mortgage they potentially offer you

All of these inform your mortgage underwriter’s decision. That’s why it’s important that your credit history is as clean and clear of defaults as possible.

That said, it’s not impossible to get a mortgage with bad credit. So, if you have run up defaults, we can help you show your credit history in its best light.

How to get a mortgage with defaults on your credit file

With any type of bad credit, there are steps you can take to improve your chances of getting a mortgage. The first thing is to find out which lender is sympathetic to your type of problem.

In this article, we’re talking specifically about credit defaults. And let’s be straight: defaults will restrict the number of lenders you can apply to. So, how do you decide which lender is most amenable to your specific defaults?

Unless you’re prepared to put in a preposterous amount of research, you don’t. You go to a specialist broker, like us, with inherent knowledge of specialist lending.

The time, money and heartache you’ll save in going through an expert are immeasurable. This is especially pertinent to higher-earning self-employed people and contractors. You probably earn more in two days than a typical broker fee.

Paying that fee has distinct advantages. You shift the responsibility of all that hard graft onto our shoulders. This, in turn, allows you to get on with business. It’s a no-brainer.

The next steps, then, are to identify:

• The specific type of default you have
• Which lender is most amenable to your wholly unique situation

Working out the specifics of your payment default

Many types of black marks can show up on your credit file. Defaults are only one such bump. Some lenders treat all defaults the same. Others consider some more heinous than others.

As I said earlier, at one time, if you’d defaulted on a mortgage repayment, it was an instant: “Computer Says No!”. However some specialist lenders take a more nuanced approach. Today, a previous mortgage payment default needn’t mean automatic rejection.

But lenders will want to know what led up to you getting a default. And, perhaps more importantly, what you’ve done to ‘satisfy’ the bad debt in the interim.

They’ll also consider the type of default (mortgage, car loan, mobile phone contract, etc.). And how long ago the default appeared on file, how much it was for, and how much is still outstanding.

Let’s have a look at what each of those default specifics means to your chances of getting a mortgage.

How long the default has been on your credit file

Defaults remain registered on your credit file for six years after the date of the default notice. It doesn’t matter how much the default was for. Neither does it matter if you’ve made reparations to ‘satisfy’ the default in the meantime. It’s on your file for six years*.

But, if there’s a default older than three years and you’ve ‘satisfied’ it, many specialist lenders will ignore it. If you have a more recent default, it shouldn’t stop you from applying for a mortgage. But, in general, the older a default is and the more you’ve done to satisfy it, the better light an underwriter will appraise your application.

The amount of defaults on your credit file

There is a tipping point beyond which you have little chance of getting a mortgage. How many defaults you have, their recency and how much each has remaining outstanding all count.

If you have multiple defaults, much will depend on how each lender appraises each factor.
Do not approach a lender without talking to a specialist broker first.

Some lenders will accept more than one default. Others won’t. In any case, getting rejected for a mortgage because of multiple defaults will have a hugely detrimental effect on your credit history. It will also severely limit your chances of getting a mortgage, or any other credit, in the near future.

How ‘satisfying’ a default potentially helps you get a mortgage

A ‘satisfied’ default is one where you’ve paid the outstanding balance off after the default notice was issued. An ‘unsatisfied’ default is one where you still owe a remaining balance.

Obviously, lenders will take a better view of ‘satisfied’ defaults. They’ll potentially ignore any that have age and were for comparatively small amounts. It’s the more recent defaults and those with bigger outstanding amounts you need to be aware of.

The severity of your individual defaults

How much you owe to your creditors is an important factor in a lender’s affordability assessment. This includes what you owe by way of unsatisfied defaults.

The type of default also plays a part. Many adverse credit lenders will consider unpaid phone bills as negligible, if they count them at all. It’s major financial defaults—car finance, bank loans, credit cards, mortgages, etc.—that underwriters baulk at.

They perhaps won’t consider an old store card debt of £150 as severe as recent missed mortgage repayments running to thousands. It’s knowing the amounts lenders consider as severe in their risk assessment that will get you over the line.

Again, it’s unlikely that you’ll get very far if your first question to a mortgage advisor is:

“What type of credit default do you consider most severe?”

If you have defaults, talk to a specialist mortgage broker first.

Why you got into financial hardship in the first place

Underwriters will also want to know why you incurred the default notices in the first place. This is especially pertinent for self-employed borrowers.

Your underwriter will want to know that you’ve steadied your financial (hard)ship. If there were specific circumstances, they will judge each on its merits.

So, moving forward, the three best ways you can prove your mortgage affordability now are:

• To have a consistent income over a defined period
• To show proof that future income is likely to maintain your current status
• To have satisfied, or are making strides to satisfy, longer-standing defaults

Why it’s important to get a copy of your credit report

We’ve been providing specialist mortgages since 2004. It would surprise you how many applicants we’ve seen have rejections because of a default they didn’t know about.

In many of those instances, they had actually satisfied that particular debt. The problem was that their creditor hadn’t updated their credit file.

Even worse, there have been defaults on clients’ files that shouldn’t have been there at all. In many instances, if you can prove that a default shouldn’t exist, you can get it removed. But, if you don’t know about a default, how can you do anything about it?

Even if you know you have defaults, you should still get a copy of your credit report. That way, you can build a specific plan to work on paying off those debts.

This will stand you in good stead with an underwriter. If they can see you’re making reparations, it shows your intent. That alone could count for a lot in the final analysis.

Your borrowing potential if you have defaults

If you have defaults, one thing you must realise is that you won’t get offered market-leading rates. The main reason is that your specialist lender is taking on more risk by lending to you.

You may also have to find a comparatively larger deposit. Again, this is to reduce the risk the lender is taking by offering you a mortgage. Much will depend on the age and outstanding amount of your defaults.

In figures, these mean that a lender could restrict your borrowing to:

• 4.5 × your salary, compared to the standard 5 × salary
• 85% loan-to-value (minimum 15% deposit), compared to 90% LTV (10% deposit) for someone with good credit

It’s so important that you get your figures right if you have any type of poor credit. Have an informal chat with our experienced brokers about your financial situation. Omit nothing! It’s better if we spot an issue before sending your application to an underwriter.

We’ll then be able to weigh up your options, including how much you could potentially borrow. On this surer footing, you have a much better chance of getting a mortgage.

Summary: what you can do to get an underwriter on side

Throughout this article, we’ve hinted at ways to improve your mortgage options if you have defaults. Here’s a quick checklist you can begin today to help clean up your credit report:

1. Get a copy of your credit report
2. Reach out to creditors whose debt you know you’ve satisfied, but who haven’t updated their file(s)
3. Reach out to creditors who show a default that you dispute; if successful, you might get it removed
4. Begin to make reparations towards satisfying any outstanding defaults
5. Even if it means paying a small subscription fee, keep an eye on your credit score
6. Don’t apply for any other large, unessential finance in the run-up to your mortgage

You should also ensure that you’re registered at your current address. You can do this by checking the Electoral Roll. If there are outstanding amounts on your file showing at other addresses, you may well have satisfied them. You need to get those and all files updated.

Finally, realise that you are a specialist borrower. The best way to access an amenable underwriter is through a specialist broker. Only someone well-versed in dealing with bad credit will get you the most competitive deal for your unique situation.

Why choose us?

Since 2004, we’ve helped hundreds of self-employed people with bad credit to get a mortgage. And, since the cost of living crises, more highly-paid flexible workers than we’ve ever seen have hit financial road bumps.

We know that there’s a type of professional stigma around defaults. Highly-paid contractors don’t want to readily admit that their credit file’s not perfect.

But, don’t panic! You’re not alone. Not by a long shot.

An informal chat with our brokers, in 100% confidence, will help you realise your options. Today, a credit default won’t necessarily stop you from getting a mortgage.

Our lenders’ underwriters understand how all manner of self-employed people work. They also understand how easy it is today to run up a default or two. But, more importantly, they have contingency plans in place for that.

Your payment structure won’t matter, either. Limited company, umbrella or full-time PAYE: we will appraise your application on its merits.

A default is no longer the barrier to getting a mortgage it used to be. Get the ball rolling today by reaching out to our experienced broking team. We have years of experience dealing with applications just like yours. Don’t be shy!