Finding a mortgage deal can be stressful - especially if you have a history of adverse credit, as lenders may view you as a poor credit risk. If you're self-employed or a small business owner this can seem even more difficult. However, there are steps you can take to significantly improve your chances of making a successful mortgage application
Understand the problem
You may already know that your previous financial history is likely to cause a problem when applying for a mortgage. This is particularly true if there has been a major financial hiccup. For example, if you have been made bankrupt, had a previous home repossessed or have a County Court Judgment (CCJ) against you. On the other hand, you may be completely unaware that there is a problem and only discover it when your mortgage or other credit application is declined.
Whatever your situation, knowledge is power, so before you start the mortgage application process check your credit history. There are a number of online sites that allow you to do this, but they all collate information from the three main Credit Reference Agencies (CRAs) – Callcredit, Equifax and Experian.
Reports will vary from provider to provider, as they use a different range of information and score aspects of the report according to different scales, but they will all give you an idea of whether you have a 'good' or 'bad' credit report. They will all also contain much of the same information, allowing you to check the information held about you for accuracy.
Identify any quick fixes
Once you have a copy of your credit history check through it to establish whether there are any steps that you can take immediately to improve your chances of your mortgage application being successful.
- Check you are on the electoral register. It helps lenders to confirm your identity.
- Check that the information is accurate and up to date. It is possible (although rare) for lenders supply incorrect information. For example, suggesting you missed a credit card payment that was in fact paid.
- Check for oversights. For example, debts or CCJs which have been paid but have not being marked as settled.
- CCJs repaid in full within 30 days should not appear at all on your credit report. Get these removed as they can make a big difference to mortgage applications.
- Contact the CRA or lender if you spot inaccurate information and get the error corrected. If there is activity you don't recognise, it could indicate fraudulent activity such as someone trying to take out a loan in your name. In this case, acting quickly is essential.
- Check your financial associations. You will be financially associated with someone if you have had joint finances or joint credit accounts. Financial associations can negatively impact you if the other party has an adverse credit history that will affect your application.
- Remove any previous financial associations that appear on your credit report where you no longer share finances. Be prepared to provide proof that your finances are no longer linked.
Keep an eye on your finances
With so much else going on, it can be easy to overlook the day-to-day business of keeping your finances in order. Make sure all your loan, credit card and other similar payments are set up to come out of your bank account automatically, so you don't miss payments. Set up alerts on all your bank and savings accounts to notify you if the balance falls below a particular level to reduce the risk of unauthorised overdrafts.
Lenders will look at how you manage your finances as part of the underwriting process, so ensure they don't find anything to concerning. Don't forget to apply the same level of diligence to your company accounts and payments.
Don't make the situation worse
In addition to a poor credit history, there are some activities that will make lenders think twice about accepting your application. Avoid taking out so-called 'payday loans'. These short-term loans indicate that you are unable to manage your finances. Credit cards or bank loans are legitimate ways to manage your money, as long as you're not using most of your available credit.
Avoid changing the structure of your business during the mortgage application process. For example, changing your status from sole trader to limited company. The general rule is that you should try and keep your circumstances as stable as possible throughout the process.
In a similar vein, if you are an employee avoid changing jobs while you are applying for a mortgage.
Understand how to evidence your income
Lenders want to know how much you earn. If you are an employee proving your income is straightforward, you just need to provide the lender with payslips. Ensure that you have payslips covering the required period, and if you no longer receive paper payslips make sure you know how to access and download electronic versions.
The picture is slightly more complicated for the self-employed or a small business owner. You can generally prove your income using your accounts and your tax returns. If you file your Self-Assessment tax returns online, you can print off SA302 forms directly from HMRC. Again, check with the lender what period they want covered. If you file paper returns, you can request SA302 forms but bear in mind it will take a little time for you to receive them.
For limited company directors, many lenders will require that your accounts are signed off by a chartered accountant as it reassures lenders of their accuracy. The tendency is for accountants to minimise your income in order to reduce your tax burden. However, this may have undesirable repercussions if you want to demonstrate you can meet any mortgage repayments. Let your accountant know that you intend that to apply for a mortgage so that decisions can be made about how best to demonstrate your income.
If you are self-employed, you should also be aware of the different income sources that lenders will consider. In particular, you may want to think about whether lenders take both dividends and salaries into account, and how they treat any retained profits or other income sources.
Maximise your deposit
Even with a less than perfect credit history, increasing your deposit can significantly increase the likelihood of being able to find a mortgage. To put it bluntly, the more money you put down on a property, the less the lender must risk. It may be tricky but if you can boost your deposit savings to over 15% of the property value it can make a big difference to a successful application and the mortgage interest rate you receive.
Adverse credit research carried out by YouGov suggests that almost two thirds of people would feel that they were being judged for their past financial behaviour if they looked for a mortgage specifically for people with a history of adverse credit. So, it may be tempting to leave out or gloss over previous money problems. This is never advisable as past problems will be uncovered during the application process, and the lender will turn you down for not being honest on your application.
Speak to a professional
A professional mortgage broker specialising in bad credit mortgages, such as Simply Adverse, will have access to much more information than you. Criteria such as which lenders consider retained profits, how much deposit they prefer you to have or how long after a bankruptcy they will be prepared to consider your application are subject to frequent change. Specialist adverse credit mortgage brokers will have the most up-to-date information available and will ensure you apply to the lender most likely to accept you.
They will also make sure that all the information you provide is accurate, reducing the risk of having your application delayed while you provide the correct information.
Whatever financial problems you have had in the past there are always ways of improving your chances of getting a mortgage. If you're not ready to speak to a broker yet, then you can get free impartial anonymous support on adverse credit mortgages and debt support on the mortgage forum.
Copyright 2020. Article made possible by Simply Adverse.