When director Max Mace came into the industry in 2008, just after the 2007 recession, lenders catering to clients with poor credit had almost completely disappeared. Some lenders moved to more mainstream lending only and many of the adverse lenders from the early 2000s were forced to exit the market completely.
Ten years later, there are a huge amount of options for clients who have experienced financial difficulty. There are several different types of adverse credit events, all of which are looked at differently. For this article, we can put these into the following categories.
Light adverse – missed payments on unsecured debts such as credit cards, loans or utilities, or exceeding an overdraft facility
In cases of light adverse events, many clients will still be able to obtain a mortgage from a mainstream high street lender. This will depend on the number of missed payments which have occurred and how recently they took place. A good mortgage broker will know the lenders which have easier credit scores to pass and often these cases can be placed on close to market-leading rates.
Medium adverse – unsecured arrears, defaults, county court judgments or missed mortgage payments
Again, the main factor for lenders is how long ago the issues occurred, the value of the default or judgement and some cases if they have been settled or are still outstanding. Some lenders will ignore anything that is two to three years old, with some even considering smaller defaults within the last 12 months with a reasonable explanation.
Heavy adverse – debt management plans, IVAs, bankruptcy or repossession
While most high street lenders will not consider an application involving an IVA, bankruptcy or repossession until six years after the event, there are still a significant amount of options for clients who have had significant adverse events. This is an area which is almost exclusively catered for by small, specialist banks and building societies which can look at each case on its own merits. One thing that is key here is understanding what caused the event. Lenders will look more favourably on cases which have come from a marriage breakdown, sudden illness or loss of employment, rather than clients simply living beyond their means and being unable to pay back their debts. Lenders here will also be looking very closely at bank statement conduct and the financial history since the event took place. Ideally all credit needs to have been conducted well since the time of the incident. There are mortgage options available for clients who are still in an IVA or debt management plan, if that has been conducted satisfactorily.
The biggest challenges
The two biggest challenges in this area are in fact not someone’s credit profile, most commonly it is affordability and loan to value.
The lenders in the medium and heavy adverse space will not lend the 4-5x multiples of salary you will be used to on the high street. We often speak to clients who will have used a high street lender’s affordability calculator to estimate how much they can borrow, only to be disappointed that these figures are not likely to be achievable with the specialist lenders they have available to them.
Loan to values are also restricted, and while there are some lenders offering mortgages up to 95%, depending on how severe the issues, lending could be limited down to 60% LTV for the most difficult cases.
What to do if you have adverse credit and want to get on the housing ladder
Speak to a mortgage broker as early as possible. Even if you may not be able to obtain a mortgage now, if this is something you want to move towards over the next few years, it’s best to speak to a specialist broker sooner rather than later. NM Finance can advise how best to repair your credit profile and what options will be available to you and when.
Keep track of your own credit
Many clients with poor credit don’t have access to their own credit file. While free reports such as Noddle can be useful, if you are serious about improving your credit a full paid report from Experian is highly recommended. You would assume that your credit profile is the same on each credit system but often it’s not, with some items showing up on one provider’s search and not the other. Experian is the credit search system most commonly used by mortgage lenders.
Think about what your bank account conduct looks like
How you conduct your day-to-day finances is very important to the underwriter. You may be able to borrow the required amount on the lender’s affordability calculator but if your bank account shows you are under financial stress, the lender may still decline.
Cancel credit items which are not being used and be wary of taking out more finance in the run-up to making a mortgage application
While having no unsecured debts is ideal, lenders will still note ‘accessible credit’. If you have paid down £30,000 of credit card debt to zero, call the provider and cancel the card.
Pay day loans
Never take a pay day loan – while these often won’t affect your credit score directly, having any pay day loan within the last 12 months will usually trigger an instant decline from lenders. They are a clear sign that an individual is struggling with their finances.