About adverse credit lending
Sub-prime products allow borrowers with adverse credit history (also known as non-status credit history, sub-prime credit history, impaired credit history, poor credit history, and bad credit history) to qualify for a mortgage loan.
Important information about credit scoring
Credit scoring is used by lenders and organisations to rate applications for credit cards, personal loan applications, mortgages, lease purchases, mobile phones and even for subscriptions to mail order catalogues. This rating is usually a score out of 1000. The credit score is part of a credit search, which includes detailed records of the relationship a borrower has established with other lenders.
A low credit score may affect your chances of getting a loan approved.
The credit scoring that mortgage lenders use is a complex statistical expression from all credit data on the individuals credit file, along with factors such as the applicant’s income, time in employment and linked residential address history. The score reflects applicants overall creditworthiness to the proposed lender, and lenders credit score pass marks vary in accordance to the type of products they offer.
The credit score takes into account a range of factors these include payment history records, available credit limits, outstanding credit balances and ratios of credit balances in relation to agreed credit limits. Late, missed and overdue credit, loan or mortgage payments will significantly affect the credit score and will affect an individual’s creditworthiness when applying for credit, oe secured lending.
If any creditor needed to make actions to recover overdue debts, there may be notices of defaults or county court judgements CCJs) recorded on the credit file. Any occurrence of missed or late credit payments, loan or mortgage payments would indicate increased financial risk on the proposed borrowing.
Improving or repairing credit history when applying for a mortgage
There are ways to improve or repair your credit history over time. It is useful to have some understanding how lenders and credit organisations use credit scores when evaluating potential borrowers risk to bad debt. Lenders use different credit scoring methods and can varying the credit score ‘pass mark’ for particular products.
As brokers, we do have access to lenders’ criteria relating to the type and classification of adverse credit they will accept on particular products and mortgage schemes. Some lenders for example will ignore credit card balances, allow unlimited CCJ’s or mortgage arrears on sub-prime and adverse credit mortgage schemes. Other lenders will only ignore CCJs and defaults if over 3 years old, fo example.
Some companies offer to repair credit or offer credit score boosting services. While it may be possible to improve your credit score through various techniques some credit repairing practices may involve fraudulent activities.
It may be possible to optimise your credit rating through some simple good credit housekeeping. Having balances on credit cards up to the maximum available limit indicates financial difficulties, so try to keep balances on credit cards within 1/3 of the available credit limit. Applying for too many lines of credit in a short space of time will also adversely affect your credit score. Make sure that goods or services you sign up for do not involve a credit search and leave several months between applying for credit and ensure all credit commitments are paid ontime.
Where there are registered county court judgements (CCJ’s) or mortgage arrears, and missed and consecutive late credit payments, then a longer term plan to recover credit rating is required. If the registered debts are not correct as a result of fraud then these need to be taken up legally with the credit issuer and credit referencing agency to get the judgement removed from your credit file.
Does the purpose of the loan affect the lenders decision?
If applying for increased credit on a remortgage the lender would also consider the purpose for additional borrowings as an impact on the financial risk. For example, if the loan is for a luxury item that is likely to expose the applicant to further financial liability e.g a motor vehicle or leisure yacht. If on the other hand the proposed increased in borrowing is to be used to consolidate other borrowings, such as clearing outstanding balances on credit cards, this should have positive effect on disposable income and consequently increase ability to repay and service debts in the future.
Loans for Home Improvements may also affect the risk of lending and chances of the lender approving the loan. Improvements to the property would potentially reduce the lender’s risk as enhancements made to the security would increase the value of the property, lowering the loan-to-value of the debt.