Mortgage with defaults

The world of home ownership can be complicated, particularly when dealing with the financial implications of ‘mortgages with defaults’. This term refers to the scenario where a potential borrower has a history of defaulting on previous credit agreements, a circumstance that can greatly influence their ability to secure a mortgage. While this situation may pose some challenges, it is certainly not insurmountable. There are specific mortgage products and lenders who cater to individuals with such credit issues. Our aim is to guide you through the intricacies of obtaining a mortgage with defaults, exploring factors such as the impact of the default on your credit score, potential solutions, and how you can improve your chances of getting a mortgage despite previous financial missteps.

Can I get a mortgage with a default?

Yes, it is possible to get a mortgage even if you have a default on your credit report, but it can be more difficult. Here’s why:

1. Impact on Credit Score: A default is a negative mark on your credit report and can lower your credit score significantly, making you seem a higher risk to lenders.

2. Lender Policies: Each lender has their own policies and criteria when it comes to assessing mortgage applications. Some lenders may reject applications from people with defaults, while others may still offer you a mortgage but potentially at a higher interest rate.

3. Time Since Default: The impact of a default on your credit report decreases over time. Generally, if the default is over six years old, it should no longer appear on your credit report in the UK.

4. Reason and Amount of Default: Lenders may also consider the reason for the default and the amount of money involved. A small, one-time default due to a missed payment may be viewed differently than a series of defaults or a default on a significant amount of money.

5. Current Financial Situation: Your current financial situation will also be considered. If you can demonstrate that you’ve regained control of your finances and are managing your money responsibly, this can increase your chances of being approved for a mortgage.

6. Deposit Size: The size of your deposit could also make a difference. The bigger the deposit you can put down, the less risk the lender takes on, which can improve your chances of being accepted.

If you have a default on your credit report and you’re seeking a mortgage, you might want to consider consulting with a mortgage broker or advisor, particularly one who specialises in adverse credit situations. They can help you understand your options and find a lender who may be willing to work with you. Remember to also focus on improving your credit score and demonstrating good financial behaviour.

What is a default?

A default occurs when someone fails to meet the repayment obligations of a loan or credit agreement. This typically happens after several missed payments and often results in the lender closing the account and recording the default on the borrower’s credit report.

In the context of credit reports, a default indicates that a person has failed to pay back a debt as originally agreed. It’s a serious mark that indicates significant financial difficulty and it can remain on your credit report for six years from the date of the default, regardless of whether you’ve since paid off the debt.

A default can have serious consequences for your ability to borrow in the future, as lenders view it as a sign of high risk. This can lead to being refused credit or being offered credit with higher interest rates.

In the UK, before a default is added to your credit report, you should receive a default notice from the lender, which is a formal letter to say that your account is about to default. This typically comes after three to six missed payments, but it can vary depending on the type of agreement and the lender’s policies. The default notice should give you a chance to make good on the missed payments and prevent the account from defaulting.

Does the type of default I have matter for a mortgage?

Yes, the type of default can significantly influence your chances of securing a mortgage, as it gives potential lenders insight into your financial management and reliability. Here’s a deeper look at how different types of defaults could impact your mortgage application:

Utility Default: These are defaults on utility bills such as electricity, water, or gas. While any default is a negative mark on your credit report, some lenders may view utility defaults as less severe than others, especially if they are small in amount and have been satisfied (paid off).

Telecommunication Default: These include defaults on mobile phone or internet contracts. As with utility defaults, some lenders may be more lenient with these, especially if they’re small and have been satisfied.

Consumer Credit Default: These refer to defaults on unsecured debts such as credit cards, store cards, or personal loans. These types of defaults may be viewed more seriously by lenders, as they can indicate issues with managing credit.

Secured Loan Default: Defaults on secured loans like a previous mortgage, car loan, or any other debt secured against an asset are generally seen as more serious, as they demonstrate an inability to maintain repayments on significant financial commitments.

Payday Loan Default: Defaults on payday loans may be particularly concerning to lenders. Payday loans themselves can often be seen as a sign of poor financial management, and a default on such a loan may significantly lower your chances of being approved for a mortgage.

Rent Default: If you have defaulted on your rent, this could be a significant red flag to potential mortgage lenders, as it suggests you struggled to manage your housing costs in the past.

How can I get a mortgage with a default?

Getting a mortgage with a default can be challenging, but it’s not impossible. Here are some steps you can take to improve your chances:

1. Wait for the Default to Clear: In the UK, a default will drop off your credit report after six years. If you’re not in a hurry to buy, it might be best to wait until the default is no longer on your report.

2. Repay the Defaulted Debt: If the defaulted debt is still unpaid, paying it off can help improve your creditworthiness. A ‘satisfied’ default is better than an ‘unsatisfied’ one in the eyes of the lenders.

3. Improve Your Credit Score: Besides the default, ensure all other aspects of your credit report are positive. This means paying all your bills on time, reducing your debt-to-income ratio, and avoiding any additional negative marks like late payments.

4. Save a Larger Deposit: The more money you can put down as a deposit, the less risk the lender takes on. This can make them more likely to approve your application despite the default.

5. Consider a Guarantor: Having a guarantor or co-signer on your mortgage can help alleviate some of the risk for the lender, which might make them more willing to approve your application.

6. Speak to a Mortgage Advisor: A mortgage advisor or broker, especially one who specialises in adverse credit cases, can provide valuable advice and help you find a lender who may be willing to work with you.

7. Manage Your Finances Responsibly: Demonstrate to lenders that you have made changes to your financial management and that the default was a one-time issue. This might involve creating a budget, reducing unnecessary spending, or setting up automatic payments to ensure you don’t miss any future bills.

8. Be Honest with Lenders: When applying for a mortgage, it’s important to be upfront about your credit history. Trying to hide a default could lead to your application being denied.

While having a default can make it more challenging to get a mortgage, it doesn’t make it impossible. The key is to prove to potential lenders that you’re a responsible borrower despite past issues.

How long does a default stay on my credit file?

In the UK, a default will stay on your credit file for six years from the date of the default, regardless of whether or not you’ve paid off the debt.

The six-year period applies even if you pay off the default partway through this period. However, once you have paid off the default, it should be marked as ‘satisfied’ on your credit report, which looks better to prospective lenders than an ‘unsatisfied’ default.

After six years, the default will automatically be removed from your credit report, and it will no longer affect your credit score or be visible to lenders. However, during the time it’s on your credit report, a default could make it more difficult to get approved for credit, including mortgages, credit cards, and loans.

How can my income help me get a mortgage with a default?

Your income plays a significant role in any mortgage application, and it can indeed help you if you’re trying to get a mortgage with a default. Here’s how:

Debt-to-Income Ratio: This ratio, which is a comparison of your income to your existing debts, is a key factor that lenders look at. A lower debt-to-income ratio can indicate that you have enough income to manage a mortgage payment, even with other debts in play. It can be especially helpful if you’re applying with a default on your record.

Stable Income: A stable, reliable income can make you more appealing to lenders, as it indicates that you’re likely to be able to make consistent mortgage payments.

High Income: A higher income can also be beneficial in getting a mortgage with a default. It could allow for larger monthly payments, which can in turn mean a shorter mortgage term and less risk for the lender.

Disposable Income: Lenders may look at your disposable income – what’s left after all bills and expenses have been paid. If this is a substantial amount, it may help convince lenders that you have room in your budget for a mortgage payment, despite the default.

Proof of Income: If you can provide proof of regular income (for example, through payslips or tax returns), this can help reassure lenders that you have a steady stream of income to cover mortgage payments.

Increasing Income: If your income is increasing consistently, this can also be seen as a positive factor, showing potential for future stability and growth.

Can I get a mortgage with a recent default on my credit history?

Getting a mortgage with a recent default on your credit history can be more challenging, but it’s not impossible. Many mainstream lenders may be hesitant to approve your mortgage application because a recent default could signal that you’re currently struggling with financial management.

However, some specialist lenders and products are designed to help those with adverse credit events, such as recent defaults. These are sometimes referred to as ‘bad credit mortgages’ or ‘subprime mortgages.’

Here are a few steps you can take to increase your chances:

Repay the Defaulted Debt: If the defaulted debt is still unpaid, paying it off can show lenders that you’re taking steps to resolve your financial issues. An ‘unsatisfied’ default could be seen as an ongoing financial problem, while a ‘satisfied’ default suggests a past issue that has been dealt with.

Save a Larger Deposit: The more money you can put down as a deposit, the less risk the lender takes on. A larger deposit could help counterbalance the risk associated with a recent default.

Improve Your Credit Score: Besides dealing with the default, make sure all other aspects of your credit report are as positive as possible. This includes paying all your bills on time, reducing your overall level of debt, and not applying for new credit unnecessarily.

Prove Your Affordability: You will need to demonstrate that you can afford the mortgage payments. This means showing consistent income, a reasonable debt-to-income ratio, and controlled spending habits.

Get Professional Advice: Consider consulting a mortgage broker or advisor who specialises in adverse credit situations. They can provide valuable advice and help you find lenders who are more likely to approve your application

How soon after a default can I get a mortgage?

The timing for when you can get a mortgage after a default can vary significantly depending on various factors. Some lenders may reject applications from people with recent defaults, while others may consider applications even with defaults in the past 12 months. A lot depends on the policies of individual lenders, the details of the default (e.g., how much was owed, whether it has been repaid), and other aspects of your financial situation.

In general, the impact of a default on your ability to get a mortgage decreases over time. After six years, a default is automatically removed from your credit report in the UK, and many lenders may be more willing to consider your application at that point.

However, some specialist lenders or brokers work specifically with individuals who have had credit issues, including defaults, and they may be able to assist you in securing a mortgage sooner.

If you’re looking to get a mortgage after a default, it can be beneficial to work with a mortgage advisor or broker who specialises in adverse credit situations. They can guide you through the process and help you understand when and where you might be able to get a mortgage. Improving your credit score, saving a larger deposit, and demonstrating a stable income and responsible financial management can also increase your chances of being approved for a mortgage after a default.

Can I get a mortgage with a satisfied default?

Yes, it is possible to get a mortgage with a satisfied default, although it might be more difficult compared to if you had no defaults on your credit history. A satisfied default means that the defaulted debt has been fully repaid. This looks better to potential lenders than an unsatisfied default, as it demonstrates that you have taken steps to resolve past financial mistakes.
However, even a satisfied default can still affect your credit score and your ability to get a mortgage. Here’s why:

Impact on Credit Score: A default, even if satisfied, will stay on your credit report for six years from the date of default. It’s a negative mark that can lower your credit score, which lenders use to assess your creditworthiness.

Lender Policies: Each lender has their own criteria for assessing mortgage applications. Some lenders may be more willing to consider applications from people with satisfied defaults, especially if they occurred several years ago, while others may be more cautious.

Other Factors: Lenders will also consider other factors, such as your current income, job stability, other debts, and the size of your deposit. A strong application in these areas can help offset the impact of a satisfied default.

How much can I borrow if I have defaults?

The amount you can borrow for a mortgage, even if you have defaults, primarily depends on your income and the lender’s criteria. In general, mortgage providers typically lend between 4 to 4.5 times an applicant’s annual income, though some may lend more under specific circumstances.

However, having defaults on your credit record can potentially limit how much you can borrow. Lenders may see you as a higher risk borrower, and as such, they might offer you a lower loan-to-value ratio, meaning you might need to provide a larger deposit.

How can my income affect getting a mortgage with a default?

Your income is a crucial factor when lenders consider your mortgage application, even more so if you have a default on your credit history. Here’s how income plays a role:

Affordability Assessment: Lenders need to be sure you can afford the mortgage payments along with your other financial commitments. They’ll look at your income versus your expenses (including existing credit agreements) to make this determination. A higher income could indicate a better ability to manage these payments.

Debt-to-Income Ratio: This is your total monthly debt payments divided by your gross monthly income. A lower ratio means you have a smaller amount of your income dedicated to debt, which could make lenders more comfortable in giving you a mortgage, even with a default in your history.

Stable and Reliable Income: Regular, reliable income from a stable source or job is generally seen as a positive by mortgage lenders. It suggests you’ll be able to maintain your mortgage payments over the long term.

Type of Income: Some lenders might be cautious if a significant portion of your income comes from bonuses, commission, or freelance work, as these can be less predictable than a regular salary. However, others may be more understanding, especially if you can demonstrate a consistent history of earning this income.

I have a default with further credit issues

Various types of credit issues that can affect your credit score and potential lenders’ perception of your financial reliability. These include:

Late Payments: If you’ve paid bills or other credit agreements late, this will show up on your credit report and can negatively affect your credit score. The impact tends to be worse if the payments are significantly late (e.g., 60 days or more) or if there are multiple late payments.

CCJs (County Court Judgments): A CCJ is a type of court order in England, Wales, and Northern Ireland that might be registered against you if you owe money and fail to repay it. Like defaults, CCJs stay on your credit record for six years.

IVAs (Individual Voluntary Arrangements): An IVA is a formal and legally-binding agreement between you and your creditors to pay back your debts over a period of time. It’s one form of insolvency and can significantly affect your creditworthiness.

Bankruptcy: This is a legal status for people who cannot repay the debts they owe to creditors. It’s generally seen as a last resort and has a severe impact on your credit score. Bankruptcy stays on your credit record for six years in the UK.

Debt Management Plans: This is an informal agreement between you and your creditors for repaying your debts. While not as damaging as bankruptcy or an IVA, using a debt management plan indicates that you’ve struggled with debt, which can affect your credit score and how lenders view you.

High Levels of Debt: Even if you’re managing your repayments, having a high level of debt in relation to your income can be seen as a negative by lenders.

How do UK mortgage lenders view defaults compared to other credit issues?

UK mortgage lenders typically view any negative marks on a credit report, including defaults, as signs of past financial difficulties. However, not all adverse credit events are viewed the same.

It’s important to note that every lender’s criteria and views will differ, and the impact of these adverse credit events on a mortgage application can depend on various factors, including the size of the default, how long ago it happened, whether it has been paid off, and the applicant’s overall financial situation. It may be beneficial to work with a mortgage advisor or broker who can guide you based on your specific circumstances.

Can I find a commercial mortgage lender if I have a default?

Yes, it’s still possible to secure a commercial mortgage even if you have a default on your credit history, but it may be more challenging than if you had a clean credit record. Like with residential mortgages, commercial mortgage lenders will review your credit history as part of their assessment of your application.

Commercial mortgage lenders generally consider a broader range of factors compared to residential mortgage lenders. They’ll look at the viability of the business, your experience in the industry, the business plan, and the profitability of the enterprise, alongside your personal financial history.

Can I remortgage with a default?

Yes, it is possible to remortgage with defaults on your credit record, but it may be more challenging compared to someone with a clean credit history. 

Defaults marked as ‘satisfied’, meaning they’ve been fully paid off, are generally viewed more favourably than ‘unsatisfied’ defaults. If you can, it’s a good idea to pay off any defaulted accounts before applying to remortgage.

If you have kept up with your current mortgage payments without any issues, this could help your remortgage application.

The amount of equity you have in your home can also impact your remortgage prospects. If you own a large portion of your property outright (i.e., you have a lot of equity), lenders may be more willing to approve your application, as the loan represents less risk.

Getting a mortgage once a default has been removed

If a default has been removed from your credit report, whether because it was erroneously reported or because the requisite amount of time has passed (usually six years in the UK), it should no longer directly impact your ability to get a mortgage.

While the removal of a default from your credit report is a positive step, keep in mind that lenders consider many factors when assessing a mortgage application. These can include your income, job stability, the size of your deposit, other credit behaviour, and the affordability of the mortgage payments.

Continue maintaining good financial habits, such as paying bills on time, maintaining low credit card balances, and avoiding taking on unnecessary new debts. These actions will help to further improve your credit score and strengthen your mortgage application.

Should I check my credit history before applying for a mortgage?

Yes, it’s highly advisable to check your credit history before applying for a mortgage. Here’s why:

Awareness of Credit Score: Knowing your credit score and understanding your credit history allows you to see what a potential lender will review when considering your application.

Identify Any Errors: Mistakes can sometimes appear on your credit report, such as incorrect personal information or wrongly listed defaults or late payments. Identifying these errors before applying gives you a chance to dispute them and have them corrected.

Identify Areas for Improvement: Reviewing your credit history can help you identify areas for improvement. You might find that you need to reduce your overall debt or demonstrate a longer history of timely payments.

Better Position to Explain: If you do have negative marks on your credit history, such as defaults or late payments, knowing these in advance can put you in a better position to explain them to the mortgage lender and show how you’ve improved your financial behaviour since.

Avoid Unnecessary Credit Checks: Every time a lender checks your credit, it can slightly lower your credit score. By checking your credit report yourself first, you can avoid applying for loans you’re unlikely to get approved for, thereby avoiding unnecessary credit checks.

In the UK, you can check your credit report using major credit reference agencies such as Experian, Equifax, or TransUnion. Some services allow you to check your credit score and report for free, while others might require a subscription. It’s advisable to check your credit report with more than one agency, as they might hold slightly different information about you.

Remember, a good credit score doesn’t guarantee approval for a mortgage, as lenders consider various factors, including your income, expenses, employment status, and the size of your deposit. However, a good credit score can improve your chances of approval and help you secure better interest rates.