If you are choosing a bad credit mortgage broker, there are steps to take that are specific to your situation.
A good broker should help you to find the most suitable mortgage product for your current circumstances. Bearing in mind that you will likely need a larger deposit and be charged higher levels of interest.
Ordinary mortgage providers may be unlikely to approve your application. But, a few missed credit card payments will not stop you from buying a new home.
Things to remember when choosing a mortgage broker
Mortgages are large secured loans
Even without adverse credit, mortgages are the biggest loans that most people will ever have to manage.
They are secured loans. In this specific scenario, the mortgage is secured against the property that you purchase.
Your missed credit card payments or late loan payments may just have lowered your credit score in the past. But, if you fall behind on your mortgage your home may be repossessed.
When you start your search, have a detailed household budget at the ready. It will be a valuable starting point as you consider what you can afford.
Mortgage brokers are qualified to provide advice
Mortgage brokers should help you to get the best deal, despite your bad credit.
They need to be qualified to provide mortgage advice.
Brokers should not just present you with the cheapest deal on paper. They have a responsibility to check that the deal will meet both your immediate and long-term needs.
You can switch to a new mortgage broker
You are not making a lifetime commitment at this stage.
A bad credit mortgage can be expensive, but making repayments on time can improve your credit score in just a few years.
Once your credit rating has increased, you will be able to switch and remortgage to a standard rate. This will have lower interest and smaller monthly repayments.
For perspective, do not let bad credit mortgage brokers panic you with the prices that they present.
A bad credit mortgage should be affordable, but you should not be paying those rates for the full duration of your mortgage.
Types of bad credit mortgage broker
With adverse credit, your mortgage options are limited.
Some mortgage brokers will not be suitable. Others welcome customers that may have marks on their credit file.
Whole of market mortgage brokers
These brokers are free to suggest mortgages from any provider.
Some work with mortgage applicants in a wide range of financial situations. They can see if you have a chance of being accepted for any standard mortgages.
If a standard mortgage is not suitable then they can find the best mortgage for bad credit.
If your credit rating is poor, but not terrible, then choosing a broker that covers the whole market can be very valuable. This is to check if there are suitable standard mortgages. Borderline applicants may get a better deal by taking this route.
Specialist bad credit mortgage brokers can also be classed as whole of market brokers. But they may not spend time searching through standard mortgage offerings.
They will have a detailed understanding of a very limited market. Also, they will know which products you are unlikely to be approved for.
If you have defaults, CCJs and multiple marks in your credit history, your score will probably be too low for any standard mortgage.
A specialist bad credit mortgage broker can focus on the lenders that might still approve your application.
Tied mortgage brokers
Some brokers are tied to, or employed by, specific mortgage lenders.
They will only be able to advise you about the products that are available from one mortgage provider.
Usually, tied mortgage brokers are linked with banks. They will not search the whole market, or advise you about any mortgages that are offered by anyone else.
You may want to approach your bank to ask about their mortgages but will probably get a better deal by shopping around.
How bad credit will affect your mortgage options
You will likely pay higher interest
Be prepared to pay more for your mortgage than people with better credit scores.
You may need a higher deposit
As well as paying higher interest, you are likely to need a larger deposit before you are approved for a mortgage.
This deposit should be at least 15% of the value of your chosen property. Try and apply with your deposit as high as possible.
You will need a steady income
A requirement for any mortgage is that the applicant has a steady income so that they can keep up with repayments.
A mortgage’s loan-to-value is the amount of money that you can borrow against the value of the property you are buying.
Standard mortgages usually begin at 90%. Some providers offer 100% LTV mortgages, which do not require a deposit but will need an exceptionally good credit score.
With adverse credit, it is not unusual for the LTV to be around 60-80%. You will need considerable savings to use as your mortgage deposit.
The impact of your credit history
Lenders will look beyond a single credit score.
The details of your credit history are particularly important.
One late payment in the last 12 months might be acceptable, but CCJs and defaults are likely to stop you from being approved.
If you received a CCJ or default more than a year ago then you may be approved for a mortgage with a low LTV.
If marks on your credit file are from more than 3 years ago, you have a higher chance of being approved.
Questions to ask a mortgage broker
Whole of market mortgage brokers work with a wider range of lenders. Some will work with a wider range than others.
You may want to ask a broker how many mortgage providers they include within their portfolio.
Also, you will be best served by a broker that genuinely covers the whole market. Some work with a relatively small portfolio of lenders.
Fees and charges
There are a number of different fees and charges that might be added to your bill.
Some brokers charge a commission based on the size of the mortgage that you are working with. This means that you will pay less if you are buying a one-bedroomed terrace house, and more if you are purchasing a four-bedroomed family home.
Commission-based fees are usually between 0.5% and 1.5%. A bad credit mortgage is a specialised product, and some brokers will reasonably charge up to 3% for this service.
Other brokers charge a set fee for arranging your mortgage. This is usually around £500-£1,500.
Ask for details about charges as soon as possible. They will be an important factor in your decision.
If a broker tries to sell additional insurance, it could be wise to do your own research.
Any essential insurance might be cheaper if purchased elsewhere. It does not always need to be packaged automatically with the mortgage that you choose. Life insurance and payment protection insurance are two of the most common additions.
Key Facts Illustration
Ask your broker to provide their Key Facts Illustration. They have a legal obligation to do so.
The KFI details any fees, along with the amount of commission that a broker earns or charges.
This document can show how much your broker is earning by having you as a customer.
Benefits of a bad credit mortgage broker
You may be wondering if you can skip the mortgage broker altogether.
Even people with good credit ratings are advised to contact a broker for secured loans. With adverse credit, it can be even more important.
Searching the market
Finding, comparing and arranging mortgages when your credit score is low can be a very complicated process.
Sometimes it helps to work with someone that knows where to find sub prime mortgages. They can separate the genuine from the risky.
Sub prime mortgages have had issues in the past. Many people were approved for mortgages that they could not afford, only to later miss payments and lose their homes. Bad credit mortgage brokers can provide access to responsible, authorised and regulated mortgage lenders.
Protection for the borrower
If things do go wrong, using a mortgage broker gives you an extra level of protection.
Mortgage brokers have a duty of care to their customers. They should be able to suggest the most appropriate mortgage and must be able to justify their decision.
If you later discover that your mortgage has not met your needs, you may be able to claim compensation.
If you go through the application process without a broker, arguably you will only have yourself to blame. You decided which mortgage to apply for, and the responsibility lies with you.
However, if you applied direct, you may still be able to complain. It could be argued that the lender did not accurately assess affordability. But, you are safer if a broker has been involved in the process.
Finding a bad credit mortgage broker
Using a broker is a very sensible decision for any mortgage application. It is particularly important when you are dealing with the complexities of a bad credit rating.
Finally, to find a bad credit mortgage broker you can search online. Check the Financial Services Register to ensure that a broker is authorised.