Adverse Credit Mortgages

The first step for a lender assessing a mortgage application, is to run credit checks on the applicants. Whenever money is borrowed, the details are sent to credit reference agencies. The credit reference agencies also record details of the timing of debt repayment. In this way a credit profile of individuals is compiled.

The records of whether payments are made on time covers the last 12 months. Records of defaults and CCJ's cover the last 6 years. 

Mortgage applicants who have had previous adverse credit present greater risk to mortgage lenders.

They have demonstrated (often through no fault of their own) their inability to make timely debt repayments.

This is caused by a change in the borrowers financial circumstances. This may be self inflicted, in that too much debt has been taken on, resulting in cash flow problems. More often the cause is redundancy, illness, marital or relationship breakdown, other family or personal problems, or business problems.

Whatever the cause, ultimately, a lender will involve the courts in an effort to recover the money, and a county court judgement (CCJ) will be issued. 

People who's credit rating has been impaired, have more difficulty obtaining a mortgage. The LTV's offered will be lower, the interest rate higher, and the fees charged, greater, than for a "clean" applicant.

Generally, the more time that has elapsed since the credit problems happened, the easier obtaining a new mortgage will be. This holds true, provided that no further credit problems have occurred since then. Lenders take a (relatively) more relaxed view, if a potential borrower has demonstrated the ability to deal with credit problems positively.

So, an applicant who for example had incurred CCJ's four years ago for £1,872, £987, £651, and £127, but has had a clean record since; may find it easier to obtain a mortgage than someone who until 6 months ago had an unblemished credit record, but has missed their last 2 mortgage payments.    

There are various types of adverse credit, some of which have more impact than others:

Bankrupcy and Mortgages

Bankrupcy used to carry a heavy social stigma, so did divorce, and debt. Times change, and becoming bankrupt has become easier. It does make obtaining credit difficult though. 

COUNTY COURT JUDGEMENTS

If you do not pay money that you owe, the individual or organisation to whom you owe the money can apply to the county court for a judgement to enforce the debt.

Defaults

When borrowers, using credit cards, personal loans, or secured loans, are late with their monthly payments, their credit record will show this information (for the previous 12 months).

If the borrower fails to make payments, the lender will issue a default notice. The number of payments missed, before the lender issues the notice is usually three. The notice will request that the borrower make good the missed payments, plus charges added for missing payments. It will go on to explain that if the borrower, does not make payments of the amount requested, court action will be taken. 

Mortgage Arrears

For a mortgage lender, an applicant who has had previous, or worse, has current mortgage arrears is very high risk. They have demonstrated their inability (at least for a period of time) to meet their mortgage payments.

Generally, the further in the past the arrears are, the easier it will be to obtain a new mortgage.

Applicants who have defaulted on their latest three mortgage payments will not find a lender who is willing to offer them a mortgage. You can have had a bankrupcy, a previous reposession, numerous defaults and CCJ's, say 3 - 4 years ago, and you will obtain a mortgage, provided that you have sufficient deposit money.

Miss your last three mortgage payments however, and you have no chance of persuading a lender to offer you money.

Reposession

If you continue to miss mortgage payments, your mortgage lender will a) impose punitive fees, and b) ultimately start proceedings to reposess the property. That means, take the property off you and sell it. Lenders attitudes to people who have previously been reposessed vary.  

A Quick Word About The Citizens Advice Bureau

This fine body, does sterling work on behalf of people who utilise it's services. I have a number of clients, who have found themselves with financial difficulties, and turned to the CAB for help. Help has been given in good faith, but not neccessarily in the best interest of the clients.

Why I am critical of the CAB

My criticism relates only to the advice sometimes given, to property owners who have debt problems. The CAB are not authorised to give advice on mortgages. Mortgage advice is an activity regulated by the Financial Services Authority - heavily regulated.

The usual advice given to those with debt problems by the CAB is to contact the creditors, explain the situation, and come to an agreement to make reduced payments. The CAB will usually undertake this work on your behalf. Some of the creditors will freeze interest on the defaulting account, others will not. All will register a default against you with the Credit Reference Agencies.

Where the CAB client has already defaulted on their debts, this makes absolute sense. Where a responsible person has contacted the CAB because they know that they Will Default in the near future, the advice is flawed.

It may be the best course of action for the client, but in my experience, often is not. Here's why.

The crux of this scenario is usually unsecured debt, for example on credit cards and personal loans spiralling out of control. Once the "tipping point" is reached, the homeowner is forced to borrow more money on credit cards (or use them for necessities) every month, in order to meet all bills. This obviously cannot continue for ever, although it does often continue for some time. Eventually credit limits are reached, and the borrower is unable to make payments.

Debts are usually quite large by this point, often £10,000 - £30,000 or more. The borrower realises that things are about to go very pear shaped and contacts the CAB.

The CAB follow their usual procedure, and the situation is stabilised. Some lenders will freeze interest, some will not.

Except, you now have defaults against your name for each debt, and have entered into a voluntary arrangement with your creditors, thus well and truly screwing up your credit rating.

Want to use some of the £50,000 equity in your house to pay for an operation? you're going to find things difficult, as you now have adverse credit. Need desperately to get some cash because your car has blown up, or your cental heating system has given up the ghost? Sorry, not on the High Street.

The alternative is a Debt Consolidation Remortgage BEFORE the situation goes critical, and payments to credit cards and loans are missed. For some reason, most of the time, I'm asked to help by the borrower AFTER they have implemented the CAB's advice. I'm sick of saying "If only you'd come to me first, 6 months ago, you could have had all of this under YOUR CONTROL, now ... it's too late.

What annoys me is that I have approached two seperate CAB offices and explained the situation to them, offered to host a presentation to their officers, and explain where a referral to me would be in the clients best interests. In both cases, I'm still waiting for the CAB to get back to me.  

It's not uncommon to find people with a net income of £1,500 per month - £25,000 of unsecured debt costing £700 per month to service, and a mortgage of £115,000, costing £700 per month, on a property valued at £165,000. You don't have to be Einstein to realise that this isn't going to work. They have usually approached their mortgage lender, who is not interested in doing anything to help. 

Often these people have had months of worry, have difficulty sleeping, and are beginning to suffer physically.

Yet, as a temporary solution, it is possible to roughly HALVE the monthly debt servicing cost by obtaining an interest only debt consolidation remortgage. 

The debt cosolidation remortgage approach is not without it's problems of course, you're trading unsecured debt for secured debt. Not repaying capital bears risk, and some adjustment to lifestyle is needed. It does not suit everyone, nor everyones circumstances.

But which situation would you rather be in, given the choice?

If these are your circumstances, and you'd like to talk to me about your choices, you can contact me here.