How Just Mortgage Brokers Can Help You
When it comes to managing your budget and your monthly bills, missing a payment here and there is not the end of the world – although it is certainly not something we would recommend. The real problems are likely to start when you miss a series of payments, or fail to pay the full amount due over a number of months – usually anything from three to six. At this point you risk being sent a default notice from the creditor(s) in question, which only adds to the stress you are no doubt already under.
What is a Default Notice?
You might be wondering, what is a fault – actually a default – notice. A default notice is a formal letter that must be sent after three to six payments to the same creditor have been missed or have not been paid in full, putting the account in arrears. Sending a formal default at this stage is a legal requirement, but it is not an indication that legal action has commenced.
Default notices can only be issued for debts regulated by the Consumer Credit Act. The notice will set out the situation very clearly and will typically include information about:
- The agreement terms you have broken
- How much you need to pay to put the account in order
- The date this payment should be made by
- The consequences if you fail to comply with the request
- How long you have to respond to the notice (usually 14 days)
There are immediate consequences associated with a default notice. The creditor can:
- Demand the outstanding balance (not just the overdue amount) be paid in full
- Pass the debt to a collection agency
- Start court action
- Start proceedings to repossess any assets that form part of the agreement (for example, a car or a property)
Should you receive a default notice, then it is vital that you respond to it. You might feel like stuffing the letter into a drawer and forgetting about it, but that is only likely to make things worse.
If you can afford to bring the account up to date, then you should do that. If you are able to repay the overdue balance within the timeframe set out in the default notice, you can ask to have the default removed from your credit report. (If you fall into this category, then get a copy of your credit report from the three main credit reference agencies – Experian, Callcredit and Equifax –to make sure it has been removed.)
If you are not able to clear the arrears, get in touch with the creditor and see if you can come to an agreement about how to pay off the balance, or – if you have deliberately withheld payment due to a dispute – make sure their accounts department are aware of the situation.
It is far better to get in touch with them at this stage than to try to pull the situation back out of the fire if they commence legal proceedings against you. If you can avoid having a County Court Judgment (CCJ) registered against your name, then you should.
Are Some Defaults More Severe Than Others?
Yes, they are. All lenders will consider secured loan or mortgage payment defaults to be very serious and weight them accordingly when making a decision.
However, some lenders are more relaxed about, for example, missed payments on mail order accounts or mobile phone contracts. Defaults on credit cards and loan repayments fall in the middle ground.
A default will stay on your credit file for six years, which could affect your ability to access credit in the future. However, despite what many people might think, it is still possible to find a competitive bad credit mortgage with a default (or defaults) on your file.
Default Mortgage Criteria
Defaults on a credit file are one of the most common reasons for mortgages to be declined but, generally speaking, they are not as damaging as certain other types of adverse credit event, such as Individual Voluntary Arrangements (IVAs) or bankruptcies, for example.
Having said that, the likelihood is that if you have a default on your credit file, your mortgage application will be automatically turned down by the high street banks and building societies. However, as all lenders’ criteria is different, one size certainly does not fit all, and with a specialist broker’s knowledge of the market a deal with a mainstream lender may still be available. Alternatively, there are still plenty of specialist lenders out there that are willing to consider an application for a bad credit mortgage with defaults.
That does not mean a bad credit mortgage with a default will necessarily be as competitively priced as if your credit record were clean, and you will usually need the assistance of an experienced bad credit mortgage broker to find the very best deal.
There is also still plenty of work that can be done to repair your credit rating. Please refer to our repair your credit rating page for simple tips on what actions to take.
How Soon After a Default Can I Get a Mortgage?
The longer a default has been on your record, the less impact it is likely to have on your ability to obtain a competitively priced mortgage. It will stay on your credit record for six years from the date of the default, after which point you can start to repair your credit rating.
What if My Default is Satisfied?
Satisfying (that is, paying off) a default before you apply for a mortgage will almost certainly improve your chances of being accepted, but it is not necessarily always the best thing to do. Generally speaking, those lenders that grant bad credit mortgages are more concerned with when the default(s) occurred than whether they were settled.
Getting a Mortgage Once the Default Has Been Removed
Once the default has been removed from your record, then providing there are no more adverse credit events and you meet the lender’s criteria, your chances of getting a mortgage improve massively.
It is also possible, however, to obtain a mortgage while there is still a default – or defaults – on your credit record. There are a number of specialist bad credit mortgage lenders out there that will consider your mortgage application even with a default present, and when using a broker such as Just Mortgage Brokers, with our extensive knowledge of the market, it may even be possible to obtain your finance from a mainstream provider.
Whatever your credit status, there are arguably two main elements to be considered when it comes to a lender deciding what offer they should make to you. They are affordability and the loan-to-value (LTV) ratio ie the size of the deposit or amount of equity needed.
To assess mortgage affordability – in other words, your ability to repay what you borrow – lenders look at your income and your outgoings. As well as typically wanting to know how much your bills cost, they will also want to know how else you spend your money – for example, how much you spend on groceries, childcare where applicable, and so on. To assess this they will look at your bank statements. Usually you will be asked to provide statements for the previous three months, although in some cases they may ask to see statements for up to six months.
The lender will decide how much they are prepared to offer based on their affordability assessment. (This may be more or less than you would ideally like to borrow.)
Someone with an unblemished credit record who is comfortably paying their bills and other living expenses each month might expect to be able to borrow up to five times the amount of their income.
Anyone with adverse credit events recorded on their record will be considered a greater risk, especially if they are also carrying substantial debt, and so will usually be unable to borrow as much. Again, the age of the adverse event has a bearing on the decision, and the longer ago it happened, the better your chances of borrowing a greater amount.
As a general rule of thumb, those with exemplary credit records can borrow more than those with adverse events on their credit record; and those with few other financial commitments can borrow more than those with heavy financial commitments.
The Loan-to-value (LTV) Ratio
The loan-to-value (LTV) ratio is the percentage of the market value of the property you want to buy or remortgage that the lender is prepared to offer.
The LTV available will usually be higher for those with unblemished credit records, whereas a greater deposit (larger amount of equity for remortgages) will generally be required from those with adverse credit events on their credit report.
What Size Deposit/Amount of Equity Will You Need?
Generally a borrower would be expected to put down a deposit of 10% of the value of the property they wish to purchase, or in some instances 5% if for example, they are buying under the government’s Right to Buy scheme. If your defaults are over three years old, then this could also apply to you.
Things are different in the case of more recent defaults, and the value of the default may also be an issue.
If your defaults are over one year old, you can expect to be asked for a deposit of 15%. If your defaults are over two years old, you can expect to be asked for a deposit of 10%.
If you need help and advice in relation to this, get in touch; our specialist mortgage brokers can help you.
Getting a Mortgage With Defaults & Adverse Credit
If, in addition to one or more defaults on your credit report, you also have other adverse credit issues, then getting a mortgage will be that bit more difficult. What the other issues are, and when they occurred, will be important factors in the decision-making process.
Considering some of the adverse credit events you might have on your record, IVA and bankruptcy will have the greatest impact, whereas late payments on unsecured debts is likely to have the least. Mortgage arrears and CCJs sit somewhere in the middle.
A word to the wise – always try to avoid taking out payday loans, as they are judged to be a warning sign that you cannot manage your finances month to month.
Getting a Mortgage With A Satisfied Default
Satisfying the default might improve your credit score somewhat; it does not, however, affect how long the ‘black mark’ will stay on your credit record, which is for six years from the date of the account default.
It is also the case that the older the default, the less impact it is likely to have on your mortgage application. Lenders are most interested in your recent credit activity, so if you have a default, even if it was registered within the last couple of years, you may be able to find a mortgage if you know where to look.
How Can We Help?
Your best chance of finding a bad credit mortgage with defaults is to contact a specialist broker. At Just Mortgage Brokers, we have a team of specialist brokers who understand the market inside out and know exactly where to turn to find the best deals on bad credit mortgages with defaults. With unlimited access to the market and exclusive rates that are not available on the high street, we can help you fully consider your options. We can also help you with your mortgage application and provide personalised mortgage advice.
Get in touch today for free initial advice and no-obligation quotes from our team of experienced bad credit brokers.