Scared about past debt ruining your chance to get a mortgage? Fear not.

By Hayley Hemmings
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Do mortgage lenders care about a few missed debt repayments? Will it have any bearing on you getting a mortgage now?

There’s not really a short answer to these questions above, because different mortgage lenders work in different ways. However, there are some standard criteria that lenders will look at when deciding whether to give you a mortgage or not.

Your debt situation will be taken into account

Their decision will depend on what kind of debt struggles you’ve had in the past, along with how much debt you currently have. Lenders will want to see what your credit report can tell them about how you’ve been handling your finances.

If you’ve missed a few debt repayments before, you may notice a “default” on your credit file. Defaults are usually recorded when three to six debt repayments are missed. Mortgage lenders don’t like to see defaults when they’re checking out your credit history, because it shows that you’ve fallen behind with your repayments. To know more about what lenders know about your ‘financial history’ click here.

Defaults stay on your credit file for six years. With that said, lenders tend to look at recent credit history as well as past credit history. So if you’ve had one month where you’ve missed a payment by accident around 4 years ago, your application may be viewed more positively than if you’ve missed a few repayments close together just last year.

If you’ve had a County Court Judgment (CCJ) in the last 6 years, or been in a debt management plan, you will likely have more of a problem getting a mortgage.

There are lenders prepared to lend to those with bad credit history but they’ll want to mitigate the risk of lending to you as much as possible. This usually means that you’ll be charged a higher rate of interest and you’ll need a pretty hefty deposit to help sweeten the deal.

If you’ve been made bankrupt before, the details stay on your credit file for 6 years, just like defaults and CCJs. But the stigma of bankruptcy can hang around even after that, as some mortgage lenders will ask you if you’ve ever been made bankrupt.

It’s not impossible to get a mortgage after bankruptcy, but you’ll need to make sure you’ve got all your ducks in a row before even thinking about applying. That means letting a good amount of time pass before applying, making sure that your finances are in tip-top condition and that you have a large deposit ready.

First-time buyers often aim for a 20% deposit. You may need more than that if you’ve been made bankrupt in the past – perhaps as much as 50%.

How to prepare for a mortgage application after debt struggles

The most important thing to do if you’re thinking of applying for a mortgage after debt problems is to get your finances in order and your credit rating as high as possible. Check out these considerations below:

Improve your credit rating

If you haven’t already done so, you can take advantage of a free trial with with one of the three credit reference agencies , Experian, Equifax or Callcredit and research what information they currently have on file for you. This post will give you some great pointers on how to improve your credit rating in general.

If you think your past credit history is going to cause problems, look closely at any defaults or other issues that are on your file. To find out what are defaults and how to fix them, here’s an article that covers that.

Providing you’ve settled any debts where you’ve defaulted in the past, you could always write to the creditor in question and ask them to mark your debt as “satisfied”. There’s no guarantee that they will do this, but it’s worth a shot.

Also take a look at the dates of any defaults to see how much time has passed. This will give you a good indicator of whether it’s worth applying for a mortgage now or whether you should wait a little longer.

Keep on top of current repayments

Lenders like to see that you’re managing your current lines of credit well. If you’re the kind of person that forgets to pay a bill, make sure you have direct debits set up well in advance of applying for a mortgage. That will be one less thing to worry about!

Consider how your current debts appear on your file

Mortgage lenders don’t like to see payday loans on your credit file. This shows that you’ve been struggling to make your money last until payday - so avoid them if possible.

Also be aware of how much debt you currently have, even if you’re making repayments on time. For example, if you’ve maxed out all your credit cards and you’re making the minimum repayments, this probably won’t look too good.

Why? Because it shows that you’ve borrowed as much as you possibly can and you’re not currently doing much to pay it back. A better approach would be to reduce the amount of debt that you have to a level where you still have a good credit balance available.

Perhaps aim for a 30% to 50% debt balance to limit ratio. This will show that you don’t have to rely on credit cards all the time.

Where to seek help and advice on mortgages

When you apply for mortgage, it will leave a trace on your credit file – which isn’t great if you get declined. So it’s important to do your research first, before submitting an application.

You could talk to a qualified mortgage adviser to get their view on your current situation first. Check out Vouched For to find a trusted adviser in your local area.

Alternatively, you might want to contact London & Country; they are a specialist broker that gives fee-free mortgage advice over the phone.

 

Top Takeaway

If you’re a young professional who’s had problems with debt in the past, that doesn’t mean that you won’t be eligible for a mortgage. However, it may mean doing a bit of legwork in advance to get your finances in the best shape possible.

Lenders will judge your application based on your credit history, credit score and how well you appear to be managing credit now.

 

Are you worried about your past debt hindering your mortgage application?

 

Author Bio: Hayley Hemmings is a freelance writer, blogger and tea addict from Yorkshire. She’s passionate about money matters, frugal living and loves anything handmade. When Hayley’s not writing, she’s most likely to be found enjoying snuggles with her little girl or walking her border collie through the beautiful Yorkshire countryside.  

 

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