How can bad credit affect your mortgage application?
Having a poor credit history makes you a riskier option in the eyes of mortgage lenders, and can affect:
- Who will lend to you: You’ll have fewer choices of lenders because you won’t meet the lending criteria for most.
- How much you can borrow: You may not be able to get the usual 3.5 times your salary, for example, if you’ve defaulted before, made late payments, or got too much other credit to manage.
- The rate the lender will offer: You won’t qualify for the best interest rates if you have bad credit, they’ll charge you extra to mitigate the risk.
What checks do lenders make?
When you apply for a mortgage, the lender will run a check on one of these databases to see your credit history:
This credit report shows the lender your past and current credit commitments, and the way you’ve managed them.
Your outstanding credit, other outgoings, income, and number of dependants, will help them assess your affordability, and affect how much you can borrow.
You can find out more about credit checks, credit scores and your credit check rights in our guide: How to check your credit record.
Ways to improve your credit rating
There are things you can do to boost your credit rating and improve your chances of being approved for a mortgage:
- Check your report: Use the Central Credit Register website or Irish Credit Bureau website to see what the lender will see, to help you decide whether it’s the right time to apply for a mortgage.
- Reduce the balance of your loans/credit cards/overdraft: The less outstanding credit you have, the more you will be able to borrow with a mortgage.
- Pay off any arrears: and then wait to apply. You may need to wait as long as two years from paying off your arrears on an unsecured loan and four years for a secured loan to meet some lenders’ criteria, but check.
- Check your credit report before you apply: When you’re at the stage of applying/reapplying for a mortgage, check that your credit report has been updated with any changes e.g. arrears now cleared, loan balance reduced etc.
How to get a bad credit mortgage
Getting a mortgage with bad credit is more difficult, but there are steps you can take to improve your chances.
1. Find a flexible lender
Research different lenders’ lending criteria and choose one that’s less strict.
For example, Finance Ireland is more flexible around previous credit issues, but they don’t offer a quick fix.
Arrears on unsecured loans must be more than two years ago, and more than four years ago for secured loans.
2. Get help from a broker
You could use a mortgage broker (mortgage credit intermediary) who has a good knowledge of the main lenders and their criteria, to find you a suitable lender.
This is likely to save you time, and avoid additional credit checks that can damage your credit record further.
Too many credit checks in a short space of time raises the alarm to other lenders as it shows you’re struggling to get credit.
3. Apply for a government scheme
The Rebuilding Ireland Home Loan is a mortgage scheme that can make buying a home more affordable for first time buyers, providing you meet the eligibility criteria.
One of the key criteria is proving that you have been declined for a mortgage by two banks or building societies.
The two fixed rate mortgage options lasting 25 or 30 years, make it easier to budget for your payments, as they won’t change for the entire mortgage term.
To apply for the Rebuilding Ireland Home Loan, you’ll need to complete an application on the Rebuilding Ireland website.
4. Save a bigger deposit
The more you can save up, for example by reducing your spending, the easier it will be to apply for a mortgage.
Our mortgage deposits guide has tips to help you cut costs and save for a deposit.
5. Be prepared
Don’t apply for a mortgage or approval in principle until you’ve done your preparation.
Here’s how to prepare for a mortgage application.
6. Get the timing right
Waiting for as long as possible to apply after clearing any arrears, could increase your likelihood of getting:
- Approved by more lenders
- Approved for more credit
- A better interest rate
A cheaper interest rate will make payments more affordable, and you could even overpay your mortgage.
How to choose the right mortgage
If you’re approved for a mortgage, make sure you can afford the payments long term. It’s likely you’ll have been offered a high interest rate product which will increase the cost.
If you choose a fixed rate mortgage, your payments will stay the same but if it’s a variable rate mortgage, your payments could go up as well as down.
An interest only mortgage is cheaper, but may only be suitable in the short term as you only pay off the interest, not the capital.
If you do go ahead and borrow, make sure you have the right mortgage protection and other insurances for your mortgage.
Bad credit mortgages FAQs
What does having bad credit mean?
Bad credit is usually caused by missing payments or making late payments on your credit agreements e.g. loans and credit cards.
Our guide: How to check your credit record covers more on this and credit scores.
What happens if I fall behind on my mortgage payments?
If you miss any mortgage payments and can’t catch up, your mortgage will go into arrears.
As soon as you know you’re in financial difficulty, you should contact your lender or the Money Advice and Budgeting Service (MABS).
They can offer free, independent advice and help you to understand the next steps.
Never ignore the problem as you could face losing your home.
