Can you get a mortgage with a default?

Mortgage lenders offer finance based on risk, hence the request for your credit history and income information. If you’ve previously defaulted on a loan, you present a higher risk to lenders that you may not be able to repay the loan if they offered it to you. This is why loan applications are often declined by standard lenders if there are defaults on the file.

That said if you do have defaults to your name, it doesn’t mean that you can’t get a mortgage. There are a number of lenders who specialise in adverse credit lending and the tendency for lenders to consider a wider audience of borrowers in the UK has only been increasing since the last credit crunch.

Although getting a mortgage with defaults against your name is possible, it’s not an easy process. Lenders and mortgage brokers will want additional information from you to ensure their investment is as secure as possible. Being honest and transparent with your adviser and lender will always work in your favour as you can pretty much guarantee they will find any issues anyway and being upfront is always viewed as a good trait.

Remember, your adviser can only give you information based upon what they know about you, so keeping things from them will only compromise the application process.

Check your credit before applying!

Even if you know you have defaults, you should still check your credit rating to ensure there isn’t anything else on your file which might adversely affect your chances of being approved for a loan. Although there is no fixed credit rating that lenders will require before offering a loan, keeping your credit as healthy as possible will only increase your chances of approval.

There are 3 different credit rating agencies and different lenders will use different agencies, so make sure you check all 3 thoroughly as your score can vary greatly between them and a lender may not cross-reference the information. You will also need to know exactly how many defaults you have and when these occurred. Lenders will often have strict rules as to the level of defaults they will allow before declining a mortgage application.

For many commercial lenders, they won’t consider an application for someone who has defaulted on a loan within the last two years, so it’s not worth applying to them for a mortgage with defaults within their restricted periods. You can usually obtain your credit reports once a year from each agency free of charge, so there’s no excuse not to gather this information before applying for a mortgage or any other type of loan, particularly if you’re aware of potential reasons for rejection.

If you don’t have this information and provide it to your advisor then you’ll find the application process incredibly difficult and frustrating. It’s also worth checking through your reports for any other issues which might arise. Issues such as late payments or arrears on a loan will also negatively affect your score, as will more significant matters including CCJs, IVAs or declarations of bankruptcy and it’s important that you have full details if any of these are relevant.

In terms of the default, find out what type of account it was (for example, a default on a mobile phone bill will often be looked at in a more forgiving light than a default on an IVA or other debt agreement), the date the money was due and defaulted, the amount defaulted and, if you settled the default, the date upon which this was settled. Don’t forget to check the bottom of your statement for any public record information which might be relevant to your application.

How much can I borrow?

Lending options are viewed in the context of “loan to value” (LTV), which defines - as a percentage - how much money you can borrow based upon the purchase price of the property you’re looking to buy. Through the Government’s Help to Buy Scheme, it is possible to borrow up to 95% of the value of a property, even if you have defaults on your file.

 That said, not everyone will be eligible to borrow 95% of the property value through a mortgage with defaults and a lender will look closely at the severity and dates of any defaults in order to consider whether they will require a larger deposit or equity to secure their investment in case of a further default. The property value isn’t the only thing mortgage lenders will consider; they will also want evidence of your income.

This will usually be by way of a PAYE (payslips) evidence if you’re employed or details of your accounts if you are self-employed. Different lenders will require different documents to evidence your ability to repay your loan and may want you to show that you have been in the same position for 12 months or longer when considering your application. In most cases, if you have defaults, you’ll need to speak to a lender specialising in adverse credit mortgages, who may be stricter when it comes to affordability than a high street lender.

If you have a clear credit rating you may be eligible to borrow up to 5x your annual income. In special circumstances, a lender may even consider offering more than 5x income, although this is rare. If you’re applying for a mortgage with defaults then the maximum lenders will be willing to offer will be reduced as lenders will want to minimise the risk they’re taking on by lending to someone with defaults. A common way in which adverse credit lenders minimise risk is by requesting larger deposits or more equity from the borrower.

They’re also likely to reduce the amount they’re willing to lend to closer to 4x annual income, assuming the default is over 3 years old. If you have defaulted more recently than the amount you can obtain will likely be further reduced. Usually, the more serious the issue, the higher risk you pose and the less a lender will be willing to offer.

What if I’ve satisfied my defaults?

Naturally, swiftly satisfying defaults against any loan will minimise the damage caused to your credit rating, so it’s always worth repaying any defaults as quickly as possible.

Having settled defaults on your file when applying for a mortgage should make the application process slightly easier if the lender runs a full credit score as it should allow you to achieve a lower ‘tier’ of risk, rendering you eligible for better loan rates.

That said, when it comes to mortgages, the more flexible lenders may not run a full credit scoring system so it may not be essential for defaults to be settled before applying for a loan. Others may only be interested in the date the default occurred, rather than the settlement dates, so you’re just as likely to be approved for a loan regardless oas to when the default was repaid.

Severity of default

The severity of the default may also influence the type, rates and additional restrictions on loans for which you may be eligible. As an example, it’s much easier getting a mortgage with late credit card payments than it is if you’re applying with a default against a personal loan or lease agreement.

On the minor end of the scale, some lenders will pretty much ignore minor defaults such as an unpaid mobile phone bill or default against a mail order account. Slightly more severe defaults include unpaid utilities (gas and electric) bills, payday loans and credit cards, rising to personal loans, car finance defaults and defaults against a lease agreement. Any defaults including a secured loan will always be looked at more harshly, so it’s important to keep an eye on these, with bridging loans or mortgage defaults being viewed as the most severe and therefore undesirable type of default.

Although the above is a generally accepted list as to the severity of default offences, some mortgage lenders won’t consider the different types of defaults and will mark any unpaid loan as a black mark against your name, regardless as to the severity. If you have a ‘minor’ default on your file, it’s worth discussing this with your mortgage advisor as you may wish to avoid lenders who blackmark anyone with any sort of credit issue in preference for a more forgiving lender.

Timing of default

It’s not just the severity or number of defaults against your name which will affect your ability to obtain a favourable mortgage: the timing of the default will also affect your eligibility.

 When you think about it, this makes perfect sense. A default 10 years ago is very different to one which took place in the last few weeks. It makes sense for lenders to give consideration to your most recent issue when assessing the level of risk you pose to them.

 Usually, if the default is over 3 years old, you will still be able to obtain the maximum LTV of 95% (assuming the rest of your credit is in order and there’s nothing else to preclude you obtaining the highest LTV). For defaults which occurred within the last 2 - 3 years, you’ll only be eligible for a maximum LTV of 85%, however, you won’t need to worry too much about how many defaults occurred during this period or how expensive these defaults were. If the default was within the last 1 - 2 years, you will usually only be considered for a loan with a maximum number of 2 defaults within that 2 year period.

The lender will also want to see that the amount defaulted didn’t exceed £1,500 in the last 12 months, although it won’t matter too much what amount was defaulted previously. If you’ve defaulted within the last 12 months before applying for a loan, you will find lenders more strict as to what they will accept. You must not have defaulted more than twice in that 12 month period and the amount defaulted cannot exceed £1,500.

Other types of credit issues

  • Defaults aren’t the only thing which can negatively affect your credit rating and eligibility for a mortgage or other loan. Before applying, take the time to check your scores to ensure you don’t have any other black marks against your name and resolve these insofar as is possible.
  • Anyone looking to take out a mortgage, whether they have defaults or not, should always give their credit rating some attention before starting the application process to maximise their chances of being approved for a good rate. Giving your credit regular health checks is strongly recommended by finance professionals.
  • Going from the most severe to least, other issues which might affect your credit include current IVAs, discharged bankruptcy and repossession of your property, completed / satisfied IVAs, any debt management plans in place, arrears on an outstanding mortgage, any CCJs, defaults, late payments against unsecured loans and a general low credit score. Getting a mortgage with any of the above credit issues will be more difficult than if your credit score is sparkling, but if you have multiple issues it will be even harder.
  • The more severe and numerous the problems with your credit score are, the more this will limit the number of lenders who will consider your application for a mortgage as well as the rates, fees and LTV you may be offered.
  • Another important thing to note here is the use of payday loans. Although mentioned in the ‘severity of default’ section, the act of simply using a payday loan is not strictly considered ‘adverse credit’, but it is worth being aware that lenders will consider any payday loan usage when considering your loan application and you may find using this type of loan can harm your chances of approval even when you have repaid the loan in full.

Get in touch

For further information and advice, please contact the expert team here at The Mortgage Hut.

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