“I really want to get a mortgage but my credit score is very poor”

A reader asked:

I really want to stop renting and own my own house. But I’m in my mid thirties and my credit score is very poor.

I’ve been careless and sometimes stupid, there were two defaults in 2018 and several more before that. None of them yet repaid. I’ve not used my credit card since January but the balance is huge.

Can this be done? Is it worth trying to fix this?

You have to decide if “really wanting a house” is a serious aim, something you are prepared to give up other things to achieve or is it just a vague daydream.

To get a mortgage you will need to do three things:

1. Pay off a lot of debt – clear all the defaults and get other debts down;
2. Save a deposit; and
3. Repair your credit record;

1. Pay off a lot of debt

The defaulted debts

Your aim is to show a future mortgage lender that your debt problems are as far in the past as possible.

This means repaying all the defaulted debt as soon as possible.

As a rule of thumb, there are likely to be high street lenders that will offer mortgages at an OK rate if:

• all your defaults are more than three years old and
• they were all repaid more than a year before.

So that should be your target. You should go through a broker to apply for a mortgage – you don’t want to apply to a lender with stricter criteria – but for now this is what you should be working towards.

You need to set up payment arrangements to clear these defaulted debts. Many of them may already have interest frozen, if not, make sure you ask for this to be done.

Your other debts

If you have debts with missed payments, these ideally need to be cleared, but in three or four years time if the balance are falling fast (not just minimum payments on the cards) and you haven’t missed any more payments, that may be ok.

Even debts with no problems showing need to be falling – if you think your credit card balances are huge, a mortgage lender may well think so too… And you are paying interest on this so the faster you can pay off debt, the less interest you get charged the next month.

2. Save a deposit

This has to be done!  But the timing of it when you also need to repay debts is a hard balancing act:

• paying off debts first puts your problems further in the past, which looks better to a mortgage lender;
• paying off debt you are being charged interest on saves you money, speeding up the process;
• saving in a LISA for longer maximises the help you can get from the government.

When you have some idea about how long it’s going to take you to sort out the debts and save a deposit, it’s easier to think about the order to do these things. See Save a house deposit or pay off debt? which looks at this in detail.

3. Repair your credit record

You may think this one should have come first. But there is no magic trick to repairing your credit record, it just takes time!

The debts with defaults will disappear from your credit record six years after the default date. So the last ones will go in 2024.

That may sound like a long time. But is it? It sounds a though it’s going to take a few years to clear debt and save a deposit. Although your credit record may feel like the biggest obstacle, it may sort itself out while you actively tackle the debts and save.

Also you don’t need a perfect credit record to get a mortgage, so you may not need to wait that long. Repaying problem debt won’t increase your credit score, but it will help with a mortgage application.

The key thing here is to prevent any further harm to your credit record during this time:

• getting payment arrangements in place for your defaulted debts won’t just help clear them, it also stops getting CCJs, which would be a disaster for a mortgage application;
• miss one payment in 2021 and you are putting back your mortgage payment by years! Set up Direct Debits wherever possible to avoid making a mistake;
• be very careful when you switch utility or mobile providers that you have paid the final bill – don’t cancel the DD too soon.

Timescales, speeding things up and realism…

How long this will all take depends on how large your debts are what house prices are like in your area and how much spare income you have to pay off debt and save a deposit.

The reader said they had been “careless and sometimes stupid”. It’s good to be honest about whether this was simple overspending and lack of attention to bills, or whether it’s your income and the cost of renting that is the real issue.

If just repaying your debts looks impossible, let alone saving a deposit, get some good debt advice. Don’t let worries about your credit rating or a future mortgage stop this, because until you can deal with your debts, you have no hope of owning your own house.

But if it should be possible…

Have a look at ways you could speed up debt repayments. If you were given unaffordable credit, from payday loans to credit cards and overdrafts, could you make an affordabilty complaint?

Can you make major cut backs in your spending? If cutting down dramatically on holidays, takeaways, gadgets etc could save thousands a year, you have to decide if buying a house really is your most important ambition, important enough for the changes to your lifestyle.

At 35 this isn’t a decision you can put off much longer. A few years now to sort your debts out and save a deposit leaves enough time for a mortgage to be repaid before you retire. Wait till 45 and for many people it would be impossible.

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