How Bad Credit Buy to Let Mortgages Work: Credit Issues Explained
Let's run through the main types of credit issues, and how they might impact your buy to let mortgage application.
Low credit score
A credit score isn't the same thing as your credit history; it is a score that draws on multiple references and reporting criteria.
Your credit history is the timeline of your financial conduct and usually runs over the last six years. The score associated depends on the criteria used by that specific lander.
Credit scores consider your credit history, your age, level of income, the LTV ratio of the property you wish to buy, and the location where your prospective investment property is based.
You can have a low credit score without having bad credit history - for example, if you have moved multiple times, or haven't ever had any borrowing to build up a positive track record.
Low credit scores can make it tricky to secure mortgage lending, but don't necessarily mean that you cannot take out a mortgage. It may mean that you cannot access the lowest interest rates, but we work with many lenders who don't consider a credit score the primary factor and can lend as high as 85% LTV.
In some cases, you can build up a positive credit score relatively quickly - if you're interested in doing so, please get in touch and we'll run through the options.
One thing to bear in mind is that 'hard' credit checks leave a mark on your credit file. That means that if you apply to multiple mortgage lenders, you may rack up marks on your credit file, which can make new lenders reluctant to consider your application.
It is, therefore, vital to work with a broker who can identify the most suitable lenders who will be happy to consider your application, to avoid damaging your credit score with unsuitable applications to lenders whose criteria you do not meet.
Reviewing Your Credit File Before a Buy to Let Bad Credit Application
You can review your credit file online through any number of bureaus - Experian or Equifax are examples.
Each bureau has a different way of collating information, and it is worth viewing your credit file through more than one service since the details on each might be slightly different.
For example, one credit history service might show a debt or a late payment that does not appear on another, so making sure these are accurate is essential.
Most credit reports are laid out as:
- Financial account information - this shows all of your lending products, including things such as mobile phones, credit cards and mortgages.
- Public information - whether you have any CCJs or bankruptcies on file.
- Your credit search history - showing applications made and searches run by insurance providers and prospective lenders.
Accessing your credit file has no impact on your score; it is only when a potential lender runs a 'hard' credit check that this leaves a mark on your file.
Getting a Buy to Let Mortgage With Bad Credit Late Payments
Many people have late payments on their credit file - and sometimes might have missed a payment only once.
The attitude of each lender will be different. Some would not be concerned about one or two late payments, whereas others may decline an applicant even if the late payments were some time ago.
Specialist lenders will consider the circumstances around late payments. They can still offer competitive lending rates and higher LTVs to landlords - they'll usually want to know a little more history about the reports on your credit file to be able to make an informed decision.
If you have one or two late payments that occurred some years ago, this is unlikely to have a significant impact on your ability to secure a buy-to-let mortgage.
Even if you have multiple late payments, you can still apply to adverse credit lenders who work with buy to let landlords to help them improve their payment performance.
Remember that late payments and arrears are not the same thing - a late payment is when you miss a payment, even just temporarily, on any kind of lending account. This usually has to be late by up to the end of the calendar month in which the payment fell due to be marked on your credit file.
Different lenders take a different approach:
- Missed payments on an unsecured account are usually considered less severe.
- Late payments on overdrafts, phone bills, credit cards and personal loans are all unsecured and can sometimes be considered irrelevant.
If you have made late payments on secured lending, such as a mortgage, this is more likely to be an issue and mean you are best advised to work with a mortgage broker specialising in landlords with adverse credit.
Buy to Let Bad Credit Mortgages With Arrears
An arrear is different from a late payment in that it must have been left unpaid for longer than a month to be marked on your credit file.
If you are marked as having been in arrears, you owed more than the payments due for the current month at some point in time.
Arrears on a buy to let mortgage can be considered a serious issue, as there is a risk that you won't be able to keep up with your monthly interest payments for a new mortgage.
However, it isn't unusual for a landlord with an extensive portfolio to have fallen behind in buy to let mortgage payments, such as when a vacant property has remained unoccupied.
If your mortgage arrears were a long time ago, many buy to let mortgage lenders will overlook the issue, provided you have remained in a good position since.
Many lenders will ask for your account as to why the arrears occurred, and consider that when deciding whether they can offer you a new mortgage.
Defaults
A default on your credit file remains visible for six years and happens when a formal letter is issued because you have missed multiple payments on a credit agreement.
Most defaults are logged when between three and six payments have been missed.
Revolution Brokers work with a network of buy to let bad credit mortgage providers, which is an expanding sector in the investment lending market.
Should you have defaults on your credit file and wish to invest in a buy to let property, your mortgage options will depend on factors such as:
- How many defaults are showing.
- When the defaults occurred.
- How much the default value was for.
- Whether the default has now been repaid.
If you have repaid defaults from several years ago, and have a substantial deposit available, you can still secure competitive mortgage lending for a buy to let investment.
County Court Judgements
County Court Judgements (CCJs) can be a barrier to securing lending for a new investment property. However, as with defaults, a growing number of lenders will still be happy to consider your application.
The key considerations are:
- The value of the CCJs.
- How many CCjs show on your credit file.
- When they occurred.
- Whether you have since paid off the CCJ.
The reason behind a CCJ is often the deciding factor; if this was over two years ago, you will also have a wider choice of lenders than if you have a CCJ registered within the last 12 months.
We work with several lenders who can consider investment mortgage lending for landlords with recent CCJs, so in this scenario, it is crucial to work with an experienced broker who can negotiate the terms of borrowing on your behalf.
Debt Management Plans
As the market evolves, you can now secure a buy to let mortgage even if you are in a Debt Management Plan (DMP).
DMPs are created for lots of reasons; often because of other credit issues, and financial difficulties. A DMP helps alleviate the strain of the situation by making debt repayments more manageable.
Whether or not you can secure an investment mortgage with an active DMP depends on the criteria of the individual lender. Many investors with the below circumstances can still secure competitive lending:
- An active DMP with some late payments - usually a maximum of three months.
- Some defaults - often a maximum of two registered within the last two years.
- CCJs, with a typical maximum of two registered within the last two years
If the above circumstances apply, you are still able to apply for a buy to let mortgage, with a specialist lender.
More serious credit issues such as bankruptcy, repossession or an IVA reported within the last six years, along with being currently in a DMP will restrict the lending available to you.
Individual Voluntary Arrangements
An Individual Voluntary Arrangement (IVA) can make it challenging to secure buy to let lending. It isn't impossible, but your options will be limited.
This all depends on whether you are currently in an IVA, or have a discharged IVA showing on your credit file.
If you have had an IVA but can demonstrate a satisfactory track record of repayments, and have had no issues keeping up with the terms of the IVA, some lenders will be able to offer you a mortgage. Usually, you'll need two years worth of payment history to show this.
Each lender has a different set of criteria, but the more recent the IVA and the more serious your credit issues, the larger a deposit you will need to have to secure competitive buy to let lending.
IVAs often accompany other credit issues, such as defaults, CCJs and DMPs.
Typically, lenders who will offer mortgages to buy to let landlords with these issues on their credit file will command a higher interest rate, and a higher deposit, to consider the application.
Bankruptcy
As with any kind of bad credit, having a bankruptcy on your file can make it more difficult to secure mortgage lending.
There are buy to let lenders who will consider extending mortgage lending for bankrupt landlords - and eligibility all depends on the circumstances.
If you have been bankrupt, then you are very likely to find that mainstream lenders will not consider your application under any circumstances. Contact Revolution Brokers if this applies and we will explain which lenders are most suited to your requirements.
Repossessions
As with bankruptcy, having a repossession on your credit file can make securing a buy to let mortgage impossible with mainstream lenders.
However, this also depends on the circumstances, what happened, and how long ago it occurred - and Revolution Brokers work with lenders who offer surprisingly competitive rates for buy to let mortgages even in this scenario.
If you have a buy to let repossession on your credit file, potential lenders will need to consider:
- When this occurred.
- Any other poor credit history.
Should the repossession be linked to other factors, such as severe issues with tenants in arrears, and was a one-off occurrence, there are several options.
The critical criteria in this situation is how secure the rental income is from the new property you wish to buy, how much deposit you have to put down, and therefore the level of risk that the lender is accepting.
How to Get a Mortgage or Remortgage Buy to Let With Bad Credit
Credit issues aren't unusual, and if you have a bad credit rating or are comparing options for subprime buy to let mortgages, it is vital to work with an experienced broker to avoid applying to lenders who will not be able to consider your application.
We work with a network of specialist lenders who offer low credit BTL mortgages.
What Factors Will Help Me Get a Buy to Let Mortgage UK Bad Credit?
Lenders don't just look at a credit file in isolation when deciding whether to extend an offer.
Other factors include your current affordability assessment, and what sort of deposit you have available.
Here we'll consider these other factors, and how you can improve your borrowing potential.
Affordability Assessments for Bad Credit Buy to Let Mortgages UK
Your credit file is one part of the application assessment - affordability is also an essential requirement.
This assessment is mandatory for lenders and helps them calculate whether you will be able to keep up with repayments comfortably. Affordability becomes even more crucial when assessing an application for a BTL mortgage from a landlord who has experienced bad credit issues in the past.
A lender will need to see that you can afford the repayments. This depends on your circumstances and the reasonable projected rental income from the property.
If you are a basic rate taxpayer or are investing through a limited company, most lenders will want to see rental income at 125% of the monthly mortgage payments.
Should you be a higher rate taxpayer, this rental cover will need to be closer to 145-160% of the regular repayments.
As an example, if you were applying for a £300,000 buy to let mortgage at a 5.5% interest rate for affordability testing purposes, you would expect to pay a monthly interest charge of £1,374.
In this case, a lender would need to see a rental income of:
|
Taxpayer status
|
Monthly rental income required
|
|
Basic rate taxpayer - 125% rental cover
|
£1,720
|
|
Higher rate taxpayer - 145% rental cover
|
£1,992
|
|
Top rate taxpayer - 160% rental cover
|
£2,200
|
Portfolio landlords looking for a new buy to let mortgage will need to demonstrate the rental income from across their properties to be able to prove affordability.
Lenders will also look at your other assets and liabilities. If your rental income is not high enough to support an application for the amount of borrowing you are looking for, most lenders will reduce their mortgage offer in line with that.
However, other lenders are prepared to consider your personal income as well as projected rental income, which is called top-slicing.
Top-slicing means using your personal earnings to top up the rental income to enable you to access mortgage lending for a buy to let property.
Rates and Fees for Buy to Let Mortgage Bad Credit Applicants
It is wise to bear in mind that the rates and fees charged for a buy to let mortgage for a landlord with bad credit are likely to be higher than for a landlord with a good credit history.
This can also impact the rental calculation, and you'll need to earn a higher monthly rental revenue to be able to meet the affordability criteria since your monthly mortgage payments will be higher.
Deposit Requirements for a Bad Credit Buy to Let Mortgage
The higher the deposit you have, the more likely you are to be able to secure competitive mortgage lending.
While having a bad credit rating can reduce the number of viable lenders you can approach, you can offset the perceived risk with a higher deposit and therefore, a lower LTV ratio.
This will reduce the fees and charges associated, widen the number of lenders who will be able to consider your application, and reduce the interest rates payable.
Even with adverse credit, Revolution Brokers work with lenders who will consider an LTV of 85% or even higher, depending on whether their criteria allow other assets to be included within the lending decision.
Age Factors in Bad Credit Buy to Let Mortgages UK
Some lenders will consider your age when deciding whether to lend, whereas others will look at each application individually.
While lenders can have a maximum age limit, this is often that the landlord must be no more than 100 years old by the end of the mortgage term - and others have no upper age limit at all.
Expert Help Getting a Buy to Let Mortgage With Bad Credit
Having a bad credit history does not mean that you can't invest in a buy to let property.
It does, however, mean that working with an experienced broker is vital to avoid making unsuccessful applications to lenders who will not be able to lend to you, thus damaging your credit file further.
Revolution Brokers work on your behalf to negotiate with lenders, secure your mortgage, and bring you the best deals, no matter your credit history.
Give us a call on 0330 304 3040 or send us a message at [email protected] and we will run through your best options with you.
