Can I get a mortgage with bad credit if I have a large deposit?
Successfully applying for a mortgage is all about risk. The mortgage lender knows that they will make profit (in terms of interest) on their investment in you, as long as you will pay back the loan or – if you don’t – that they will be able to sell the property following a repossession and be sure to have not lost out in the process.
If it feels coldly business-like, that’s because it is. If you have bad credit, then you become more of a risk to the lender and you need to do something to prove your stability – a larger deposit is part of that.
How large is large – what is the average deposit?
Understanding loan to value (LTV)
Selling your house is unlikely to net them the full market value. They are not going to put in the same level of effort that you might when selling it (no smell of freshly baked bread and perfectly arranged flowers for visitors) and are looking for a quick sale. On a £280,000 home, for example, the mortgage company might only get £250,000, and once their administration costs and other expenses are accounted for, that figure drops further.
If the mortgage represented 100% of the house (i.e. you had no deposit and they had leant you £280,000) and you defaulted in the first few months after paying £1000 per month, they will have made a loss with their investment. This would be the case if the loan to value ratio (LTV) was 100%.
With a 10% deposit (£28,000), the LTV would be 90% and they would scrape by with perhaps a minor loss depending on the cost of their administration.
A 20% deposit (LTV 80%), would mean that on repossession and sale, the lender still makes some money. In this case, they’d have provided £224,000 and would claim back £250,000.
The higher the LTV, the greater the risk for the mortgage lender.
Lowering LTV with a significant deposit
Can I get a mortgage with bad credit and no deposit?
It makes no sense for a mortgage lender to provide someone with bad credit and no deposit a mortgage. The risk is very high, and the relative rewards are very low.
However, you may be able to ask someone else to guarantee your mortgage for you. Having a guarantor means that someone else (typically a parent) is backing you up, saying that they are willing to make payments on your mortgage if you cannot. The mortgage is still in your name, but they are also ultimately responsible to pay for it.
Being a guarantor is a serious financial decision for anyone you ask, so it is important that if you do go down this route, you do so honestly and willing to accept a ‘no’ from whomever you are asking. They may be putting their own home at risk in supporting you and have the same fear of you letting them down as the mortgage lender.
- A guarantor will be expected to do two significant things: Place a large amount in a savings account held by the lender which is released only once an agreed portion of the mortgage is paid.
- Sign a contract securing your mortgage with their own property. This means their house is at risk alongside yours should you fail to make payments.
Is all bad credit the same?
Can I borrow a deposit?
Understanding affordabilityAffordability is a measure of how easily you can make repayments on your mortgage. If you have a high income and low outgoings then you have a strong affordability score, but if you are always scraping by each month and pushing your available credit to the limit, then you have a low affordability.
Mortgage lenders consider affordability to be a key factor in determining whether to approve your mortgage application.
If you have personal loans, credit card debt, stretched overdrafts or simply a lot of bills and regular monthly outgoings, then you are unlikely to have the kind of affordability score that will make you a promising investment for the lender.
Taking out a personal loan to use as a deposit is a sure sign of poor affordability. That doesn’t mean that it will automatically result in a mortgage application rejection, but it isn’t going to help.
It’s far better that you take the time needed to save up your deposit and pay off any other debts in order to present yourself with a strong affordability score.
Can a high deposit offset poor affordability?
If you have savings that are significant enough to present a larger deposit and your general affordability comes from a busy life rather than a large level of outstanding debt, then providing a larger deposit will lower the size of your required mortgage which will, in turn, lower the size of your monthly repayments and improve overall affordability.
It is not perhaps as good as having more cleared funds at the end of every month, but it will help.
However, it is not usually worth using other credit to increase the deposit at the loss of a strong affordability score – both factors will be properly analysed by the mortgage lender and the off-putting nature of a brand-new unsecured loan will be significant!
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