One of many mortgage myths is that if you have bad credit then you can’t get a mortgage, especially a Buy to Let mortgage. But with the right lender, it's usually possible. We don't offer Buy to Let mortgages at Haysto, but we have plenty of no-nonsense information in this Guide.
In this Guide:
How does affordability affect a Buy to Let mortgage with bad credit?
How will your age affect your Buy to Let mortgage application?
Yes, you can get a Buy to Let mortgage with bad credit. It will depend on your individual circumstances, because there’s different severities of ‘bad credit’, but getting a mortgage with bad credit is definitely possible.
Getting a Buy to Let mortgage with bad credit won’t be as easy or straightforward as it would be for someone with good credit. If you have bad credit and you want a Buy to Let mortgage then you need to seek out specialist lenders who are likely to accept you, as most high street banks and mainstream lenders aren't usually willing to lend to people with bad credit.
A Buy to Let mortgage is a type of mortgage which is sold specifically to you if you wish to buy property as an investment, instead of somewhere to live. If you plan to rent out a property, most mortgage lenders will prefer you not finance your property purchase with a residential mortgage.
There are a few differences between Buy to Let mortgages and other mortgages. Here’s a list of how they differ:
Buy to Let mortgages tend to have higher fees than other mortgages, they also tend to have higher interest rates.
Most Buy to Let mortgages are interest-only. This means you have to pay the interest every month but not the capital amount. So, at the end of your mortgage term, you end up repaying the original loan in full.
Buy to Let mortgages can be available on a repayment basis.
The minimum deposit for a Buy to Let mortgage is often higher than a residential mortgage. The minimum deposit for Buy to Let mortgages tends to be 25% of the property’s value and can vary from 20-40%.
Most Buy to Let mortgage lending isn’t regulated by the Financial Conduct Authority. There are exceptions, though. If you are going to let the property to a close family member then this is often referred to as consumer Buy to Let mortgages and are assessed the same way as a residential mortgage. This means having to meet the same strict affordability rules as residential mortgage lending. Buy to Let consumer mortgages are regulated by the Financial Conduct Authority.
Even though it might not seem like it because of what you’ve been told, some lenders are willing to accept those with bad credit. The success of your application can depend on what type of bad credit you have and certain factors. What caused the bad credit and how long it’s been on your file will be important to lenders. What will help you get a Buy to Let mortgage with bad credit, is finding a lender who specialises in your type of bad credit.
You firstly need to find out what your credit issues are and when they happened and how much you owe. You need to get your credit report, we recommend checkmyfile*. Checkmyfile shows you data from the four of the major UK credit reference agencies. The four main UK credit reference agencies are Experian, Equifax, TransUnion and Crediva. Read our Checkmyfile Explained Guide, so you can find out how to use their useful service.
Below, we’ve listed credit issues and how they can affect your Buy to Let mortgage application.
Making a late payment on a bill happens to a lot of people in their life. Some lenders might look at late payments badly but the majority of lenders understand that late payments are common and not the most severe credit issue. Mortgage lenders can still offer competitive rates and loan-to-value ratios to landlords who have made late payments before. How many late payments you’ve got on your credit record and how long ago they were will determine how seriously they take it.
For example, if you made one late payment 3 years ago, you’ll be looked at a lot more favourably than if you’ve had multiple late payments in the last year. Having a history of late payments is different from being in arrears. Late payments tend to refer to the odd late payment against an account. Usually, if the payment is made within the same month it’s due, then most lenders won’t report it as a missed payment to credit agencies.
Being in arrears is when payments have remained unsettled for longer than a month. If you owe more than any current month’s repayment then you’ll be considered to be in arrears on that account.
What’s also important is the type of account you’ve missed a payment for, this has a huge impact on your mortgage application being accepted.
Missed payments on unsecured accounts won’t be as much of a red flag to lenders as missed payments on secured credit will be. Examples of secured credit are phone bills, credit cards, personal loans, phone bills and current account overdrafts.
Your account goes into arrears when you have missed payments that remain unpaid for more than one month. You’re classed as being ‘in arrears’ when you’re currently owing more than your current month’s payments. Your mortgage will be in arrears when you’ve missed mortgage repayments and they’re overdue.
Mortgage arrears on Buy to Let properties are viewed by lenders the same way they view other missed payments on secure credit. Falling into mortgage arrears for more than one month might make lenders feel you have an inability to repay and this can affect your creditworthiness.
A landlord with multiple mortgages on multiple properties might’ve found themselves falling behind on mortgage payments. Being able to provide a justifiable explanation of your mortgage arrears will also help your Buy to Let mortgage application.
Your account goes into default when you don’t pay any bill. This happens with any type of account where you’ve agreed to pay a certain amount of money for some reason but end up not doing it. Defaults stay on your credit file for six years. Out of all the types of bad credit mortgages, the most bad credit mortgages are borrowers who have defaults. So, finding a Buy to Let mortgage with a default can be done.
If you have defaults on your credit file and you’re looking for a Buy to Let mortgage, then lenders will look at a few factors closely. Lenders will look at how many defaults you have, how long ago they were registered and how much the default was for. Lenders will also take into consideration whether the defaults have been paid off and the amount of mortgage deposit you have.
An Individual voluntary arrangement (IVA) is an agreement you make with the people you owe to pay all or part of your debts. IVAs can make it harder to get a Buy to Let mortgage, but not impossible. Most mortgage lenders won’t accept your mortgage application if you have an IVA. But there’s plenty of specialist mortgage lenders who will as they have more flexible lending criteria.
Your options will depend on a few factors. Lenders will look at if you’re currently in an IVA and when it happened. Lenders will also want to see that you made the repayments consistently and quickly throughout the time you had the IVA. You should also be prepared for lenders to ask for evidence of two years of payments.
For most lenders when it comes to assessing the impact of your IVA, they will be concerned about how long ago it was set up and if you have other credit issues.
It’s possible to get a Buy to Let mortgage if you’ve been discharged from bankruptcy. After a year of being bankrupt, you’ll be discharged from bankruptcy. This means you’ve been released from any debts covered by your bankruptcy and you’re no longer under the restrictions of being bankrupt. Bankruptcy is a legal status which means when you can’t pay any of your debts. It will be hard to get a Buy to Let mortgage after being bankrupt but as always it’s all about finding the right lender who specialises in helping people like you.
The good news is that there are some specialist Buy to Let mortgage lenders who will consider your application if you’ve had a repossession. There’s also a lot of competition between lenders in this area and rates can be very competitive. Lenders will look closely at how recent the Buy to Let mortgage repossession was and other types of bad credit you have. You’ll be looked at more favourably if the repossession of the Buy To Let property was an isolated incident.
Lenders will also look at the rental income you could get on the investment property and the deposit you have to put down.
Some lenders will consider offering a Buy To Let mortgage to a borrower with CCJs. CCJ stands for County Court Judgement and happens when you owe money to someone and they take court action against you. You’ll get a CCJ when the court confirms that you owe money.
Lenders will look at the value of the CCJS, how many you have and how long ago they were registered and if the debt has been paid off. Although how long ago the CCJ was registered will be looked at, some lenders will consider applicants with CCJs registered a couple of months ago.
You can get a Buy to Let mortgage if you’re in a debt management plan or have used one in the past. Debt management plans are offered by debt management providers and are the plans you can follow to pay off the debts you owe.
Most people who have a current DMP will also have other credit issues. Everyone’s different and lenders will consider a range of factors. If you’re currently in a DMP, you might have things like late payments, defaults and CCJs. These will all affect your mortgage application. Only specialist mortgage lenders will consider your application if you have credit issues like this.
Lenders won’t just look at your credit history when you apply for a Buy to Let mortgage. Lenders will also look at your affordability. Your affordability is how much you can afford to borrow on a mortgage and this is usually based on your income, outgoings and your credit score.
With all mortgage applications, you’ll need to show you can afford to make the payments. Buy to Let affordability models are based on the rental income of the property you can achieve and your financial circumstances. Read more about this in our Guide: What Mortgage Lenders look for in Mortgage Applicants.
The general rule with most lenders is that if you’re a basic-rate taxpayer (20%) or buying with a limited company then the rental income will have to cover at least 125% of the mortgage if the mortgage is charged at 5.5%. If you’re a higher rate taxpayer, the rental income will have to cover 145% or 160%.
Although the affordability on a Buy to Let mortgage is based on the rental income, lenders will also look at your age. Many lenders think that Buy to Let investors who are at retirement age (66) and over might be more responsible to lend to. But every mortgage lender is different and has different criteria that they use to judge if they’re willing to give you a mortgage or not.
Yes, there are mortgage lenders for people with bad credit. Whether you have a low credit score or other types of credit issues - there are mortgage lenders who specifically cover that area of the mortgage market. If you don’t have a good credit score and have had financial problems in the past then you will probably need a specialist lender.
Here’s a list of mortgage lenders who deal with bad credit applicants
Applying for a mortgage or understanding your options shouldn't be confusing, yet there are so many myths doing the rounds. We don't offer Buy to Let mortgages at Haysto, but we have plenty of no-nonsense information to help you.
Our calculators give you an idea of what you might be able to borrow, what's affordable and a rough estimate of the kind of property prices you can start to look at.
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