Getting a Mortgage with a Low Deposit. What Are Your Options?
When you’re looking for a mortgage, having a history of adverse credit can put lenders off.
The bigger deposit you have, the less you’ll need to borrow, and the more likely it is that your application will be successful.
Unfortunately, credit issues often go hand in hand with a lack of savings, which may mean that you will struggle to raise the funds for a larger deposit. In these cases, you will need to search for low deposit mortgages for bad credit. This will significantly reduce the number of deals available for you.
Simply Adverse specialises in securing mortgages for applicants with less than perfect credit reports, however even with our experience we know that it may be extremely difficult to find a mortgage deal. We have relationships with some 90% mortgage lenders and some 95% mortgage lenders but find that if you have a poor credit rating these lenders may not accept your application.
That’s why Simply Adverse thinks it’s important that you explore the other options that may be available to you such as help to buy or shared ownership properties as these often provide a better way for applicants with a low deposit to secure a mortgage deal.
What’s Available for Homebuyers with a Small Deposit & Adverse Credit?
One of the key principles of Simply Adverse as a company is honesty. So, while it may be possible for a homebuyer who has both a poor credit history and a small deposit to find a mortgage, in reality it is extremely unusual. Your chances of success are limited if you can only find a deposit of around 10% of the value of your chosen property, i.e., you will be looking for a 90% loan-to-value mortgage. If you have an even smaller deposit of 5% of the value of the property, and need a 95% LTV mortgage, then you are very unlikely to find a deal.
All is not lost though. By thinking creatively and exploring your options you may still be able to fulfil your dreams of buying a home. The UK government has a number of schemes that could support you but even these may not be suitable if you have a history of adverse credit. In particular, lenders who are participating in the mortgage guarantee scheme may be unwilling to lend to you unless you only have very minor adverse credit issues.
Help to Buy: Equity Loan – This Scheme Has Now Ended
You can no longer apply for a Help to Buy: Equity Loan. If you applied by 6pm on 31st October, your application will still be processed. You must legally complete the purchase of your home (meaning you legally own it and can move in) by Friday 31 March 2023 to qualify.
What is it?
The help to buy equity loan scheme is aimed at people buying their first home in England, and so could help you if you have been struggling to find a low deposit mortgage for first time buyers. The scheme provides homebuyers with a loan from the government that you can put towards the cost of a new home, and you can borrow between 5% and 20% (40% in London) of the purchase price of a new-build property.
The homebuilder you buy your property from must be registered for the scheme, and you will still need to be accepted for a repayment mortgage for the remaining value of your home. For example, if the house you intend to buy is valued at £200,000 and you have a deposit of 5% – or £10,000 you could apply for a Help to Buy Equity Loan of 20% – or £40,000. You would then need to find a mortgage lender prepared to lend you the remaining £150,000.
The equity loan from the government is interest-free for the first 5 years. After this you start paying interest on the loan until it is paid off. You must repay your equity loan if you sell your home or pay off your mortgage.
Who can apply?
You will need to be a first-time buyer who is intending to purchase a new-build home. In addition, the purchase price of the home that you intend to buy should fall below the relevant regional price cap (see below).
|Region||Maximum property price|
|Yorkshire and the Humber||£228,100|
|East of England||£407,400|
In addition to the specific eligibility criteria for the equity loan scheme you will also need to find a lender who is happy to give you a mortgage.
Is the help to buy equity loan scheme suitable for homebuyers with poor credit?
Like the mortgage guarantee scheme, the help to buy scheme requires you to find a mortgage and whichever lender you approach will still carry out the usual credit checks. However, the equity loan from the government is not subject to credit checks and as you do not have to pay this back for the first five years this can help you to get your finances in order. In addition, as this loan will reduce the size of mortgage you will require, repayments will be lower, and this may make a help to buy bad credit mortgage more accessible. The minimum deposit for this scheme is 5%, although unlike the mortgage guarantee scheme, you are able to put down a deposit of more than 5%, which will reduce the level of your mortgage even further. All in all, the help to buy equity loan scheme can be one of the more successful routes to a mortgage for first time buyers.
What is it?
With shared ownership, rather than buying a whole property you buy a share in the property, generally of between 25% and 75% of the property. These properties are owned by housing associations, who you pay rent to on the remaining share of your home. As you are only buying a share of a property your mortgage will be smaller and you will consequently require a smaller deposit.
Shared ownership schemes offer the opportunity to increase the share of your home up to 100% of the property. This process is known as staircasing. There are generally restrictions on when you can ‘staircase’, and you can only do this up to 3 times.
Who can apply?
In England you can apply for a shared ownership scheme if you are a first-time buyer or if you used to own your own home but now can no longer afford to buy one. Your combined household income should also be less than £80,000 per annum (or £90,000 if you are in London). In the past shared ownership schemes were often only available to key workers, this is no longer the case although military personnel will be given priority and some councils may have their own priority groups.
If you are aged 55 or over, you may be able to purchase a property through the Older People’s Shared Ownership Scheme. With this scheme once you own 75% of the property you don’t pay rent on the remaining share. Home Ownership for People with Long-Term Disabilities is another scheme that is aimed at people with a long-term disability who can’t find any other home that meets their needs, for example you may need a ground floor property.
Is shared ownership suitable for people with a poor credit history?
As with the other schemes already mentioned, an application for any mortgage will be subject to credit checks and so significant adverse credit will impact on your ability to secure a deal. In addition, if your past credit problems have been caused by poor management of your finances you should bear in mind that the amount you pay each month will include not only your mortgage repayments, but also rent.
If your previous issues with credit were only minor, or more than a couple of years ago, Simply Adverse may be able to help you secure a shared ownership mortgage with a specialist lender. For some shared ownership mortgages it may be possible to secure a home loan with no deposit. In this case only the lender and broker’s costs will apply.
95% Mortgage Guarantee Scheme
What is it?
Launching in April 2021, the mortgage guarantee scheme was announced in the March Budget. The idea of the scheme is that by guaranteeing part of a mortgage, the government will encourage lenders to offer more 95% mortgages to UK buyers.
The way the scheme works is that the government will guarantee the part of the mortgage loan over 80%. So, when a buyer has a 5% deposit, the government will guarantee 15% of the value of the mortgage, as that is the portion remaining when you add 80% and 5%. All this means is that if the homeowner defaults on their mortgage, the government will pay back some of the money to the lender.
Who can apply?
To be eligible for the mortgage guarantee scheme the mortgage you are applying for should be a residential mortgage for a property that is not a second home or a buy-to-let property. The property must be in the UK and have a purchase value of £600,000 or less. The scheme only applies to 91% – 95% LTV mortgage products, so if you are considering a 90% LTV mortgage this would not be eligible for the scheme. The mortgage must be a repayment mortgage and not an interest-only mortgage.
Is the mortgage guarantee scheme suitable for buyers with adverse credit?
As already mentioned, it is unlikely that if your credit history is very poor you would be able to find a mortgage under the mortgage guarantee scheme. While the scheme is designed to help buyers with a small deposit, the eligibility guidelines suggest that a poor credit history would be a barrier to being able to source a mortgage under the scheme.
The eligibility guidelines for the mortgage guarantee scheme are explicit that the scheme ‘is designed to help creditworthy households’ and go on to stress that all borrowers must ‘meet standard requirements in terms of the assessment of the borrower’s ability to pay the mortgage, for example a loan-to-income and credit score test’. For this reason, Simply Adverse believes that the mortgage guarantee scheme will not be suitable for borrowers with bad credit.
What are they?
Just as they sound, a gifted deposit is money that has been given you for the purpose of putting a deposit down on a house. Theoretically a deposit can be gifted to you from anyone, in reality however lenders will ask that gifts come from a close family member with some specifying that this must be a parent.
Gifted deposits must be a gift and not a loan and lenders will usually want to see proof of this. Proof will usually take the form of a Gift Deposit Letter which will confirm that the money is being given as a gift and that the person giving the gift will have no stake in the property. The gift giver will have to confirm that they are financially able to give the gift and provide evidence of this.
Are gifted deposits suitable for mortgage applicants with bad credit?
If you are in the fortunate position to receive a deposit as a gift, then this may be the most suitable way for someone with bad credit to find a mortgage. This is because increasing the size of your deposit increases the number of deals that could be available to you as the amount you want to borrow decreases. Potentially this will give you access to better interest rates, even with a poor credit history.
As a gifted deposit does not need to be paid back, it also has no negative impact on your outgoings, and so will not affect the affordability calculations that lenders will carry out.
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Low Deposit Mortgages and Bad Credit: A Summary
Broadly speaking there are 3 things a mortgage lender will be concerned about when they assess your suitability for a mortgage. Your ability to meet repayments, your credit history and the size of your deposit, as the bigger your deposit the less you will need to borrow. If you only have a small deposit and you have a history of adverse credit this will clearly place you at a disadvantage. You may be able to find a deal, but you are unlikely to find a mortgage with competitive interest rates.
At Simply Adverse we will always try and find you a mortgage deal when we can. The challenges of a small deposit and a poor credit score mean that this may not be possible, and therefore we may advise that you explore some of the options above to widen the choice available to you. If you do have a history of bad credit, increasing the size of your deposit, either by saving and delaying buying or by receiving a gifted deposit, is one of the best ways to improve your chances of finding a deal. If you would like a clearer idea of what your position is, then take our online quiz today.
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