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“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.

What are your aims for the next few years - is buying a house one of them?

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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April 4, 2019 Author: Sara Williams Tagged With: A reader asks, Credit ratings, Mortgages

Comments

  1. Cornelia Dumitru says

    April 5, 2019 at 5:44 am

    First time the answer at my credit score was told me are not enough infornationsp despite having all my council tax paid in full all year till May 2019 , despite my payslips, despite my employment, despite my electoral vote , despite my credit card paid on time …. Second time according permission to agency them computer screen become blank . Wondering if all this happened because of my foreigner name 🤔

    Reply
    • Sara (Debt Camel) says

      April 5, 2019 at 6:45 am

      Your council tax and employment will not show on your credit record but your credit card and electoral vote should.

      I suggest you look for your own credit records with all 3 UK Credit reference agencies, Experian, Equifax, and TransUnion (previously known as CallCredit). This article https://debtcamel.co.uk/best-way-to-check-credit-score/ explains how.

      Reply
  2. sue says

    September 25, 2019 at 3:32 pm

    Hi Sarah
    If you have a bank account started on the 6/4/11 then a default balance date 24/10/13 default balance of £2693 but now showing a current balance of £2677 updated on the credit file on the 18/08/19 by the Bank , will it automatically drop off your report after the 6 year period or do you have to request the agency to take it off ? and will the current unpaid balance still be on your report ? can the bank still update the unsatisfied amount on your account after the 6 year period ? Thank you

    Reply
    • Sara (Debt Camel) says

      September 25, 2019 at 7:20 pm

      So there is a default date showing on this account? If yes, the debt will drop off 6 years after that date. You don’t have to ask for this, it just happens. And it won’t reappear or be updated afterwards.

      Reply
  3. Rachael says

    January 3, 2021 at 4:24 pm

    Hi there, I really hope you can help. I got into some financial difficulties in 2016/2017 and defaulted on a capital one card totalling £1200 in feb 2017 and on a credit union loan of £300 in 2016. Both were paid off in full in 2019 and I have had zero late payments/problems in the last 4 years, with me paying off my credit card each month and having no other outstanding debt. My partner has excellent credit rating and we have a 10% deposit toward a small mortgage. I want to apply through a broker but I’m nervous with the current climate this would be pointless given my credit history and worry I’ll be directed towards a bad credit mortgage which I want to avoid. What would your advice be?

    Reply
    • Sara (Debt Camel) says

      January 3, 2021 at 5:36 pm

      You would pass what was the old rule of thumb pre-pandemic – all your defaults are more than 3 years old and they have all been paid for over a year.

      But now this may still be a problem. And it’s not that easy to get a 10% mortgage with a spotless credit record.

      There is no harm in talking to a broker and seeing what they say. But a bad credit mortgage is something to be avoided.

      Reply
  4. Rachael says

    May 25, 2021 at 12:29 pm

    Hi there, I really wanted to leave an update for this to give hope to anyone in a simmilar situation. I took your advice and contacted a broker who was brilliant and placed my partner, who has the excellent credit rating as applicant number 1 and myself as applicant number 2, this gave a heavier weighting to him rather than myself and we’ve just had a full mortgage offer from a high street bank with a 90% mortgage :) A broker is definitely the route for anyone with a complicated credit history so thank you for the advice!

    Reply
  5. Tom says

    February 16, 2022 at 10:01 am

    Hi all! Great article. I’m one of those people with complicated credit history and I wonder if you could point me in the right direction. Over the years I accumulated a significant amount of credit card debt that I put into PayPlan DMP in June 2019 and I kept to it since. My financial situation changed and I also managed to raise enough money to be able to clear all of the debt. The plan is to take the mortgage in about 18 months so it would be more than 4 years since I started DMP and more than a year from clearing all my debt. My dilemma is that since some of the debt is with likes of Cabot and Lowell I may be able to negotiate a lower settlement figure but as I understand it will affect my credit rating. The question is, am I better off paying the full debt as owned or negotiate the lowest possible settlement and put the money toward the deposit? It could increase my deposit by about 2%

    Reply
    • Sara (Debt Camel) says

      February 16, 2022 at 10:12 am

      No easy answer. See https://debtcamel.co.uk/dmp-partial-settlement/ which looks at this issue.

      How large will your deposit be? There is a big difference between an 8% deposit and a 10% deposit. Between a 38% deposit and a 40% deposit, not so much…

      Reply
      • Tom says

        February 16, 2022 at 11:21 am

        Hi Sarah, thank you for taking your time in replying to me.

        It would be a difference between 13% vs. 15% deposit.

        Reply
        • Sara (Debt Camel) says

          February 16, 2022 at 11:55 am

          I suggest you should talk to a mortgage broker about this – moving up to a 15% deposit may be significant.

          Reply

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