Buy to let mortgages with bad credit
Buy to let investors always wonder what the effect of bad credit could do to their buy to let mortgage applications and if there are buy to let mortgage lenders out there who focus of buy to let mortgages with bad credit. The good news is that there are buy to let mortgages for those with bad credit.
In this brief guide, we will cover what you can expect if you want to get a buy to let mortgage and you have bad credit.
Buy to let mortgages are mortgages which you can use when you intend to buy a property and rent it out. There are also consumer buy to let mortgages but these are for accidental landlords who did not intend to become buy to let landlords.
But to let mortgages usually have a higher rate of interest than residential mortgages and you will usually be required to put down a mortgage deposit of about 20%with most buy to let mortgage lenders offering loan to value rates of around 80%.
When looking for bad credit buy to let mortgage you may find that most high street mortgage lenders will not provide these sort of mortgages. You will ideally need to go to non-high street mortgage lenders.
Business buy to let mortgages which most buy to let mortgages fall under are unregulated by the Financial conduct authority and this means if anything goes wrong you may not be able to claim compensation from the financial services compensation scheme.
Can you get a buy to let mortgage with bad credit?
Yes, there are specialist mortgage lenders who may be willing to offer you a buy to let mortgage with bad credit but most specialist buy to let mortgage lenders will assess applications on a case by case basis and then make a determination of if they will offer a mortgage.
When looking to get a buy to let mortgage with bad credit you can reasonably expect to have to put down a bigger mortgage deposit so the mortgage lenders loan to value rates are lower. You can also expect the mortgage rates on the buy to let mortgage to be slightly higher in line with the risk the buy to let mortgage lender feels you expose them to with your bad credit.
As mentioned before the buy to let mortgage lender will consider buy to let mortgage applications with bad credit on a case by case basis and decide which they can lend to. You may want to consider using a buy to let mortgage broker who has experience of finding mortgage options for bad credit borrowers with bad credit.
When considering buy to let mortgages bad credit could be:
A debt management plan
A home reposession
A BTL mortgage with a county court judgement
Some bad credit buy to let mortgage lenders will consider lending to borrowers who have had a County Court Judgement as long as it has been satisfied whilst other bad credit buy to let mortgage lenders will want to see the total value of the CCJs regardless of if they have been satisfied to determine if the borrower fits within their lending criteria.
Each buy to let mortgage lender will have a different way in which they treat CCJs. If having a CCJ is a major concern for you and your main bad credit issue then you may want to contact a specialist mortgage broker who may be able to offer you advice on getting a buy to let mortgage with bad credit.
The buy to let mortgage lender may lend to you with bad credit but may insist that you put down a bigger mortgage deposit.
A BTL mortgage with an individual voluntary arrangement
Getting a buy to let mortgage if you have had an individual voluntary agreement in the past may be difficult depending on your personal circumstances. Buy to let mortgage lenders do not like to see borrowers who have been in such dire situations where they have to go into an individual voluntary agreement.
If you are currently in an individual voluntary agreement then you may find very few buy to let mortgage lenders who may be willing to lend to you and some will impose a minimum term since you have been in an individual voluntary agreement before they will consider lending to you.
A BTL mortgage with a debt management plan
Getting a buy to let mortgage if you have had a debt management plan in the past may be difficult depending on your personal circumstances. A debt management plan is just as bad as an individual voluntary agreement and you may find that many buy to let mortgage lenders will have similar frameworks when dealing with both. Buy to let mortgage lenders do not like to see borrowers who have been in such difficult financial situations where they have to go into a debt management plan.
If you are currently in an individual voluntary agreement then you may find very few buy to let mortgage lenders who may be willing to lend to you and some will impose a minimum term since you have been in an individual voluntary agreement before they will consider lending to you.
A BTL mortgage with a default
If you have had a default before on your credit file then getting a buy to let mortgage with such bad credit may be hard. It all depends on how much the default was for, how long it has been since the default and what your credit behaviour has been since you had the default. Different buy to let mortgage lenders will have their own criteria for considering this and you should ensure you have done some basic research before applying to a buy to let mortgage lender with bad credit.
Alternatively, you may be able to use a bad credit mortgage broker to advise you on getting a buy to let mortgage with a default.
A BTL mortgage with a bankruptcy
Getting a buy to let mortgage if you have had a bankruptcy may be hard as most buy to let mortgage lenders will have different criteria on what sort of borrowers they can accept. Some buy to let mortgage lenders may be willing to accept you if you have been discharged from bankruptcy within 12 months whilst others will use 12 months as the minimum term in which you must have been discharged from bankruptcy.
If you want to get a buy to let mortgage and you have had a bankruptcy in the past you can expect t put down a bigger mortgage deposit and pay higher rates on your buy to let mortgage.
A BTL mortgage with a home repossession
If you have had a home repossession in the past then getting a buy to let bad credit mortgage may be very difficult and if you find buy to let mortgage lenders willing to offer you a buy to let mortgage after a home repossession you can expect to see loan to value rates of 65% and lower to reflect the buy to let mortgage lenders perceived risk.
The rates on the buy to let mortgage may also be higher than usual.
A specialist mortgage broker may be able to help you find buy to let mortgage lenders who may be willing to lend on your specific type of bad credit and circumstances.
In any case where you have bad credit it may be worth looking to buiild some credit before applying to a buy to let mortgage lender.
What else can affect your affordability for a bad credit buy to let mortgage?
Aside from the above the mortgage lender will usually want to see a minimum income which is typically £25,000 for a buy to let mortgage although there are some buy to let mortgage lenders with no minimum income requirement
The rent payments on the buy to let property will usually have to cover at least 120% (for basic taxpayers) of the monthly mortgage repayments at the very minimum but for a bad credit applicant the mortgage lender may request up to 180% coverage and even more.
How much mortgage deposit will you need for a Buy to let mortgage with bad credit?
The bigger the mortgage deposit you put down the better your buy to let bad credit mortgage options may increase. You will typically need to put down a mortgage deposit of around 20% at the very minimum if you are a buy to let borrowers with bad credit but this isn’t a figure for everyone as each individual circumstance will likely be different.
Will my age affect my application for a BTL with bad credit?
Buy to let mortgage lenders do consider your age but you will find plenty of buy to let mortgage lenders with no minimum age requirement or maximum age requirement at which the mortgage term should have ended by.
Typically mortgage lenders will like to see that a mortgage term ends by 75 or by the time the borrower reaches their retirement age.
How to improve your chances of a buy to let bad credit mortgage?
There are a few things which you can do which may generally improve your chances of getting a buy to let bad credit mortgage. They include:
Buying a standard property
There is nothing worse (or maybe there is) than trying to get a buy to let bad credit mortgage and then having a non-standard construction property.
non-standard construction properties are much harder to get mortgages for due to their unique features which make valuing them for today or assuming their future values much harder.
This is bad for mortgage lenders as mortgage lenders want to know that if they have to reposses a home they could possibly get their money back in full rather than have to offer a massive price cut to entice potential buyers.
Having a bigger mortgage deposit
A bigger mortgage deposit reduces the mortgage lenders loan to value rates and therefore reduces some of their risks. If you put down a bigger mortgage deposit you may find that your option of mortgage lenders willing to give you a buy to let bad credit mortgage may increase.
Having a guarantor
A guarantor who could guarantee about 75% of your buy to let mortgage may be helpful if you have bad credit.
A guarantor buy to let mortgage may be hard to find and if you intend to seek one out then using a specialist mortgage broker who assists buy to let borrowers with bad credit get a guarantor buy to let mortgage may be a good idea.
Having some collateral
Some specialist buy to let mortgage lenders who accept bad credit borrowers may accept collateral as a way of securing the buy to let bad credit mortgage and ensuring they have some fail-safe if you default on the mortgage.
Collateral can make it much easier for a buy to let mortgage lender to lend to you but not all buy to let mortgage lenders will accept collateral.
If the collateral is your main ploy to get a buy to let mortgage with bad credit then you may want to consider seeking the help of a specialist mortgage broker who assists buy to let borrowers with bad credit.
Being an experienced buy to let landlord
Experienced buy to let landlords with portfolio buy to let properties may find it easier to get a buy to let mortgage with bad credit as the mortgage lender will look more favourably on them due to their history of repayments with other but let mortgages (if available) and their experience in the buy to let market.
If you aren’t an experienced buy to let landlord then getting a joint mortgage buy to let with an experienced buy to let landlord may make the mortgage lender look upon you more favourably.
Having a regular job
Trying to get a buy to let bad credit mortgage whilst self-employed will be a much harder task as the mortgage lender will find it difficult to rely on your personal income to cover the monthly mortgage repayments if you are self-employed.
This could be the case if the property remains vacant for a prolonged period or the tenant’s default on their rent payments. There are some mortgage lenders who may consider you even as a self-employed borrower but you may need to have a strong application.
How to get ready for a buy to let bad credit mortgage application?
When looking to make a buy to let bad credit mortgage application there are certain things you can do on your own to ensure you put yourself in the best position.
Use a specialist mortgage broker
Consider using a bad credit mortgage broker or specialist mortgage broker. When looking for a mortgage mortgage brokers will usually have access to a wider pool of mortgages than you due to all the technology they may use to search the market. They will certainly have access to more mortgages than any specific buy to let mortgage lender and may have access to as much as 11,000 mortgage products.
This means they can potentially find you a better mortgage deal than doing it alone or going directly to a mortgage lender.
If you have bad credit issues or other problems then using a mortgage lender will ensure you are able to receive relevant advice.
Try to build your credit score
Your credit score can make a big difference on what loan to value rates a buy to let mortgage lender offers you. A few points in your credit score can, therefore, make the difference from you paying a few thousand pounds extra or less. Building your credit score may take some time to try and do it in advance.
Check your credit report for errors or missing information
You should check all of them to ensure your credit report is accurate on all of them. You can do this by requesting your statutory report on each of them or you could also get a free 30 day trial from checkmyfile as they display your credit report from all four credit reference agencies in the UK.
Get your documents ready
Depending on if you are a self-empoyed borrower or not you may need a certain list of documents but they will usually include:
Your bank statements
Your payslips for the past 3 months
If you are self-employed they may also include:
Your contracts (if you have any)
A cover letter explaining any gaps in employment
How to build credit for a buy to let bad credit mortgage application?
Before we discuss how to build credit let’s address a few things which do not appear on your credit score and you shouldn’t worry about within reason.
- You salary
- Gambling activity
- Your student loan repayments
- Parking fines
- If you check your credit score
- Criminal records
- Council tax payments
- Savings accounts (Only your current accounts are shown)
A few ways you can look to build credit before making a buy to let bad credit mortgage application:
You can improve your credit score by doing the below things but you should be aware that improving your credit score will take at least a few months.
Open a bank account or credit account
The simplest thing you can do to establish or improve your credit score is to open a bank account or any other credit account.
By opening a bank account you open an account which gets reported to the credit bureaus as an account on your credit report.
The longer you have this account open for the longer you will have a credit history. It usually takes 3 years from you opening an account which gets reported on your credit file before you will have any credit history which can be seen by others.
Opening a bank account also allows you to have an account on your credit file with a verified home address. This means it will be easier for you to access credit products in the future.
A bank account might also be the easiest way to a credit card as banks are more willing to offer credit cards to account holders as they can view your account history and see how credit worthy you are even if you have a low credit score.
Ask your bank for a small overdraft facility
To Build credit you need credit so one of the ways to improve your credit score or build credit is by having an overdraft. You then need to show good behaviour when you have access to this credit.
By asking your bank to give you an overdraft facility you will have a credit account open on your credit file which boosts your credit score.
You will also have the ability to use your available credit, sticking to the 30% maximum credit utilization golden rule per credit account and thereby showing good credit behaviour which should boost your credit score even further. Always repay your overdraft as soon as you can to avoid any fees.
Get a Household Utility in your name
Some utility accounts are now being reported on your credit file and having one in your name is a very good way to improve your credit score. This means that your payment history on your gas, electric and telephone service will affect your credit score.
By getting yourself named as the account holder on these services you can establish and improve your credit score if your bills are paid on time and there are no balances or defaults on the Utility account.
If you live in a shared accommodation be sure to avoid any disputes and get payment for utilities well in advance so as to avoid any of your house mates holding you hostage and ruining your credit file.
Do you live with your parents? Ask them to put your name, date of birth and address on the utility bill. This will open a new account on your credit file and ensure you begin to get credited for the regular payments being made on the account.
If payments are missed on the account this could negatively affect your credit score so you must ensure payments are not missed.
You can also simply get a cheap phone on contract. A £5/month contract will be achievable with little or no credit history as the risk of default is very low and making regular repayments to your phone contract will boost your credit file.
You should avoid applying for more expensive phones with no credit file or score as this could damage your credit score even further even though you don’t have one.
Not all utility providers report your payment history to the credit bureaus so you may want to inquire with the utility provider before opening an account.
Keep your credit utilization below 30%
Your credit utilization is one of the factors that affects your credit score. The golden rule is to use no more than 30% of your available credit. If you are currently using above this then reducing your credit utilization below this limit will help improve your credit score
Pay down your credit card balance & other debts
Credit card balances and credit debts are recorded on your credit file. These balances have a negative impact on your score(especially when your revolving debt is over 30% of your available revolving credit) as well as costing you in interest rate charges and fees.
Paying down your credit card balances, loan balances or any default you have on utility and credit accounts will help improve your credit score.
Paying your credit card balance in full each month
Making only the minimum payment on your credit card means you have an outstanding balance which is recorded on your credit file.This negatively influences your credit file. Paying your credit balance on time full in each month will help improve your credit score
Make your credit repayments on time
Missing credit repayments negatively impacts your credit score. Keeping up with your monthly credit repayments will see your credit score improve gradually.
Making your credit repayments on time will also ensure you avoid negative credit markers such as:
- County court judgments
- Missed repayments
Get on the electoral roll
The easiest way to improve your credit score is to register to vote as this data is recorded on the public register which the credit bureaus check and include in your credit file. This is the first way to prove your identity and by far the easiest.
In the future when you apply for credit or a credit check is done, this will be the basis of their verification method for you and helps make you seem more creditworthy. You should check with your local council here if you are already on the electoral roll and if not you can register to vote here.
If you are not eligible to vote in the UK you will not be able to get on the electoral roll. In this case you can get a similar benefit by submitting a document to either Experian, Equifax or callcredit proving your identity and address. You can then ask them in writing to confirm that they have verified your identity on your credit file
Get a credit builder card
To improve your credit score you could get a credit builder card. Credit Builder cards are similar to secured credit cards as they are targeted towards people with low or no credit scores.
Credit Builder cards do not require security deposits but as with secured credit cards they will have low credit limits and high APRs.
A student credit card will likely be available on the same terms as a credit builder card. The best place to get this might be from your bank as they will be more likely to approve you for this type of card due to already having an idea of your income and expenses.
Store credit cards are usually easy to get approved for too.There are also credit builder prepaid cards which charge a monthly fee which is then recorded on your credit file as repaying a debt. This helps you build your credit score.
Get a secured credit card
Secured credit cards can be used to improve your credit score as they allow you to show you can make credit repayments, they add to your available credit which will improve your score and they allow you to show a low credit utilization which will improve your credit score.
Getting approved for most credit cards will be difficult if you have a low credit score but a secured credit card can help you overcome this.
Secured credit cards will approve you if you pay a deposit as part of your secured credit card application.
This deposit is usually your credit limit or a percentage of your credit limit. Secured credit cards aren’t very common in the Uk.
Capital one was known to offer one and you should contact them to see if this is still available.
You should be aware that secured credit cards will have low credit limits and high APRs. This can lead you to fall into serious debt if you fail to keep up your monthly credit repayments.
Get a credit builder loan
Another way to improve your credit score is by using a credit builder loan.
Credit Builder loans, just as they sound, help you build credit. The idea is you take out a loan but rather than receiving the loan funds these are deposited in an account(usually to earn interest) and you make repayments to the loan provider every month.
As you make these loan repayments on time your credit file records this and your credit score improves. At the end of the loan term you get all your loan repayments and whatever interest you have gained.
Loqbox is a credit builder loan provider in the UK.
Get a cosigner for a credit card or loan or become an authorised user
If you can’t get a credit builder loan, credit builder card or secured credit card then your next bet to help you improve your credit score will be to get yourself a cosigner on a credit card or loan.
You should really only do this if you are likely to repay your credit cards or loans on time and in full every month.
If you fail to make your credit card repayments on time then this may affect your co signer’s credit score too. If you make these repayments on time your credit score will rise and the payments will be registered on your credit file for at least 6 years.
Getting a cosigner on a credit card or loan creates a financial relationship between yourselves. This means any negative behaviour from them might affect your credit score negatively and vice versa.
A cosigner essentially allows you to qualify for credit and in some cases cheaper credit. A cosigner will also be legally responsible for any debt owed on the account if you default.
Another way to help improve your credit score is by becoming an authorised user on someone else’s credit card.
The difference between authorised users and cosigners isn’t that much. Becoming an authorised user on someone else’s credit card will help you improve your credit score if the main card holder makes all their repayments in full and on time each month as well as keeping their credit balance low.
some credit card companies might not take you into account and may not collect this data and hence report it on your credit report.
You should contact the credit card company asking them to report the fact that you are an authorised user on the credit card to the credit bureaus.
Becoming an authorised user does not give you any liability, so if the main card holder defaults you won’t be held liable but it does affect your credit score if the account is mismanaged or goes into default.
Keep your credit accounts open as long as possible
Closing credit accounts can negatively impact your credit score as this reduces the number of accounts with a credit history. This is especially worse if the credit account you close is one with a long history. The account will no longer be open and will therefore not count towards the majority of your credit score.
Unused credit accounts which don’t have long histories can be closed as they do not add to your credit score. Having access to too much unused credit may also be seen as negative.
Avoid payday loans
Most lenders look down on payday loans as they view people who take out these loans to be desperate and hence financially irresponsible.
Pay day loans will therefore have a negative influence on your credit file and you should avoid them.
Avoid making too many credit applications
Making applications for utility or credit can reduce your credit score. This is because everytime a utility or credit provider is about to open a new account they will do a hard credit search. You should only apply for credit or utility which you are pre-approved for. If you make multiple credit applications then multiple hard credit searches will be done on your credit file.
This means your credit score will go lower as the credit bureau will view too many credit applications as you being desperate. If you stop making blind credit applications then your credit score will likely improve.
You should always use an eligibility checker to see if you will be approved for credit or utility accounts before you apply. These checks are done with soft credit searches which only you can see.
Report your rent to the credit bureau
Another way to improve your credit score is by reporting your rental payments to the credit bureaus.
If you currently pay rent or paid rent within the last 3 years you will be able to report your rental payments to the credit bureau and this will be an account on your credit file showing your payment history.
Paying your rent on time will ofcourse improve your credit score whilst missed payments will reduce your credit score. The scheme is known as the rental exchange scheme and is currently only being offered via Experian.
Increase your available credit limit
Increasing your credit limit will reflect on your credit file and improve your credit score as it shows lenders are willing to trust you with more money as well as reducing your current credit utilization (how much you spend in relation to how much credit you have available. The golden rule is a maximum of 30%).
You can ask your current card provider to increase your credit limit or let you know if you will be eligible for a credit limit. Also ask if they intend to run a hard credit search on you and do not consent to this unless they will pre-approve you for a credit limit increase.
Open a new credit card account
Opening a new credit account will be your next option if your current credit card provider will not increase your credit limit. You essentially accomplish the same things as your available credit limit increases.
You must repay your balances on your credit card account every month and avoid using over 30% of your available credit. This is a good option if you want to improve your credit score.
Have a good credit mix
Mix things up a little by having a varying degree of accounts on your credit file. Like your partner, credit bureaus like to see you mix things up a little bit. By this, we mean that a proportion of your credit score is ranked by how diverse the different types of credit you have been utilizing is.
Revolving accounts (i.e. credit cards, store cards)
Installment accounts (i.e. home equity line of credit, auto loans)
Open accounts (utility accounts)
Increase your variety and your credit score will increase.
Ensure your registered address is the same on all your credit accounts
Any active accounts on your credit file should display your correct address. You can check the addresses on your accounts by viewing your credit file. Make sure all active accounts list your current address. This may improve your current credit score.
Check your credit score regularly
Checking your credit score regularly is one of the ways to ensure that the information on your credit score is indeed up to date.
It also informs you on what your credit score is and this allows you to have an idea of which credit providers may lend to you.
If you find any errors on your credit score or report you can contact all of the credit bureaus or the specific credit bureau where the error is mentioned and ask them to make the necessary corrections.
The credit bureaus will check and investigate the matter but in the meantime put a notice of correction on the record entry so that any third parties who are checking your credit score will be aware that the entry may be incorrect.
The credit bureau will usually let you know the outcome of their investigations within 28 days.
Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.
Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.
Remove negative financial links
You should check your credit file for financial links that you don’t recognise. Some financial links can reduce your credit file as this might mean your credit score is going down due to someone else’s bad credit behaviour.
Any financial links which seem out of the blue can be removed from your credit file. Financial links can be generated by just sharing apartments with someone else, getting a loan with someone else etc. You should ask the credit bureaus to correct this .As you remove these negative financial links your credit score should improve.
Use a Government scheme
Government schemes help you reduce the amount of mortgage deposit you may need to put down, reduce the price of the property or create a structure that increases your mortgage affordability much sooner than it would have been.
Some of these include first-time buyer government schemes whilst others in this list are accessible to you even if you are not a first-time buyer.
Government schemes are not available to you if you are getting a buy to let mortgage.
The Government schemes include:
- Lifetime ISA– gives you a government bonus of £1,000 if you save a maximum £4,000 a year.
- Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
- Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy– allows you to buy your home at a discount price.
- Preserved right to buy– same as above.
- Right to acquire– similar to the above.
Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.
Use a mortgage broker for your mortgage in principle
You may want to use an independent mortgage broker to help you get a mortgage on your new home.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.
This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.