Mortgages are the largest and most expensive loans and hence their approval criteria differ from personal loans. While your abysmal credit report does not get in your way of qualifying for small loans, this could be one of the biggest reasons for the repudiation of your mortgage application. A golden rule of thumb says that you must have a good credit score. However, it does not preclude the possibility of putting in an application despite a bad credit rating.

If your credit score is not up to scratch, you should apply to a mortgage provider who accepts applications from subprime borrowers, too. Remember that any approbation could still be more challenging. Approval conditions for subprime borrowers are stricter than those with a clean past payment record. For instance, while a 10% deposit is required to get on the property ladder, this becomes double when your credit score is not up to snuff. Further, your lender would expect you to have a strong income source as monthly payments would be larger due to hefty interest.

Why is it difficult to apply for a bad credit mortgage?

A bad credit mortgage is complicated to have approved because there is a high risk of default. Though the loan-to-value will drop from 60% to 80% by increasing the size of the deposit by 20% to 40%, interest rates will be exorbitant. As a mortgage is to be discharged over several years, lenders cannot trust your repaying capacity. Chances are your financial condition is turned upside down. You might end up falling behind on payments.

Mortgages are secured with homes you purchase. In case of a default, lenders will repossess your house and liquidate it to cover their money, but the process of liquidation involves loads of formalities and hassle. No lender wants to spend their time, money, and energy on it. Therefore, they prefer to accept applications from those who have a good credit score.

The importance of your credit score

Your credit report is an acknowledged of your financial commitment. When you borrow money, every lender expects you to pay it back on time. They report your on-time payments to credit reference agencies. The payment record is noted down in your credit file. If you do not miss any payments, your credit score stays good. Otherwise not.

Bear in mind that no lender will conclude that you missed payments due to a lack of income sources. Late payments and missed payments reflect your irresponsibility. If you try to take out a mortgage despite a poor credit rating, lenders are more likely to assume that you will make a default even if your income sources are high.

You must have come across some lenders suggesting high-income sources to offset the impact of a poor credit rating, but the fact is that it is not possible. Your credit report reveals your past financial behaviour while your income estimates your capability of making payments. One cannot overrule the need for another.

Ways to improve your chances of qualifying for bad credit mortgages

Here are ways to improve your chances for a mortgage with bad credit:

• Improve your credit score

Whether or not mortgage lenders accept applications with a poor credit rating, you should always try to ameliorate your credit rating. Bad credit providers will charge high interest rates. They make it complicated for you to adhere to payments. With a good credit score, you would be able to qualify for lower interest rates.

Lenders do not check your credit rating to know your score. The score your credit report records is only for your reference. They have their own means to determine the risk involved in lending you money. Of course, interest rates will be quite high when your credit rating is not so good.

Lenders are basically keen to know about missed payments, late payment fees, the type of credit you have, and how much debt you have. It is likely that you never missed any payment, but despite that, you would be deemed to be a highly risky borrower due to too much debt.

Do not forget that mortgages are to be paid over an extended period of time. Their repayment time cannot end before 10 years. If you already owe too much debt, they might deduce that you would struggle to keep up with payments because of multiple debt obligations.

As a result, your borrowing capacity will be affected. Not only will they restrict the mortgage amount, but they will also charge high interest rates. You should try to fix your credit score before applying for a mortgage.

• Reduce debt-to-income ratio

Pay attention to your debt-to-income ratio, too. This would not have a direct impact on your credit score, but lenders carefully examine this to ensure you will not struggle to keep up with debt payments. A debt-to-income ratio suggests that the total amount of debt that you borrow against your income. Ideally, it must not be more than 30%.

When your debt-to-income ratio is high, lenders would not be able to trust your repaying capacity. It is likely that you will struggle to keep up with mortgage payments along with other debts. Before applying for a mortgage, make sure that you do not owe too much debt.

It is a good idea if you do not owe any money at all. However, if that is not possible, make sure that it is less than 25%. Try not to apply for bad credit loans in Ireland  to meet emergency expenses because it will be seen as your budgeting skills are not good, and you will continue to rely on such loans after taking out a mortgage. This might make it challenging for you to settle your debts.

• Buy with your partner

Taking out a mortgage with your spouse could increase your chances of being accepted. This is because mortgage lenders would peruse the credit reports of both applicants. If your spouse has a good credit rating, you should be able to have better chances of acceptance. However, do not forget that lenders will check the repaying capacity of both partners. It might not be a nice idea if your spouse does not have a good income source.

Even though it is a joint mortgage, lenders would evaluate your individual capacity for repayments. If one of you refuses to repay the mortgage, the other will be required to discharge the full payment. In other words, both applicants are partly and completely responsible for payments.

• Arrange a guarantor

You should arrange a guarantor to increase your approval rate if you do not have a co-applicant. Make sure that the guarantor has a good credit rating. The guarantor will be responsible for making payments when you make a default. The guarantor will be either your parents or any other family member.

The final word

A bad credit mortgage can be challenging to get approved. Most of the lenders do not feel inclined to lend you money when credit score is less than fair, and if they do so, they charge very high interest rates.

You should try to improve your credit score first. Keep your debt-to-income ratio also low. If credit score improvement is taking a longer time, consider arranging a guarantor or applying with your partner.