If you have recent or multiple defaults on your credit file, it's normal to worry that your mortgage options may be limited or that you won't get a mortgage at all. But the good news is, if the default occurred over two years ago and was for a small amount, your chances of getting a mortgage will improve.
What is a default?
Many people only discover they have a default after they check their credit file for a completely different reason. But what actually is a default? And, should you worry about it?
Put simply, a default is a negative marker added to your credit file when you miss several payments on a credit agreement (e.g. a credit card or a payday loan) and the lender closes, or defaults, the account as a result.
It's essentially used to let lenders viewing your credit file know that you have missed payments in the past and, therefore, may struggle to afford the payments on a new credit agreement.
However, you should never be issued a default out of the blue, as lenders are legally required to warn you of a default in the form of a formal letter called a 'default notice'. This is a letter you'll receive after three to six months of missed payments, giving you an opportunity to repay the debt within a certain timeframe (usually 14 days) before further action is taken.
If no action is taken within 14 days, a default will be added to your credit file.
How much unsecured debt do you have?
How long does a default stay on your credit file?
Once you have received a default, it will stay on your credit file for six years, and your credit score will be damaged. The six-year period begins from the date the account defaulted, not the date you missed the first payment.
However, all defaults drop off your credit file after six years, even if the outstanding balance hasn’t been repaid during this time.
If you repay the money owed at any point during the six years, the default won’t be removed from your credit file, but it will go from being an unsatisfied to a satisfied default, which can let lenders know that the debt was eventually repaid.
Can you get a mortgage with defaults over 2 years old?
If you have a default over two years old, and you’ve not accrued any since, lenders may be more willing to approve your mortgage application than if the default were new.
In fact, some lenders may ignore your default altogether if you’ve since made up for the missed payment, especially if it was for a small amount.
Because a default signals that a credit account has been closed due to multiple missed payments, it’s viewed slightly more negatively than a single missed payment, and you’ll be considered a high-risk borrower.
It’s also important to note that some defaults are more serious than others. For example, there are likely to be fewer consequences for defaulting on your phone contract than for defaulting on your mortgage.
How can I improve my chances of getting a mortgage with a default?
There are many things you can do to improve your chances of getting a mortgage with a default, including:
Make current payments on time
Positive financial behaviour can lessen the impact of a default on your credit report by showing lenders that the default isn’t indicative of a bigger, ongoing problem.
This can be done by making all payments in full and on time (e.g. rent, bills, and car finance) and making a plan to deal with any other outstanding debts. It’s also a good idea to avoid applying for new credit if possible, as this can make it look like you’re reliant on credit.
Pay a higher deposit
If you can pay a larger deposit, the less money you’ll need to borrow from a lender, and the less risk they’ll be taking in lending to you. If you can wait a while longer and save an extra 5%, this could make a huge difference to the mortgage term you’re offered.
There is no correct answer to how much deposit you need for a mortgage with a default, but the more the better. This may also allow you to secure a better mortgage rate, which will reduce the amount you pay over the course of your term.
Contact a specialised mortgage broker
If you’re struggling to find a mortgage with a high street lender or high street bank, a specialised broker may be able to match you with a lender who offers mortgage deals to individuals with poor credit scores due to past financial problems. These are often called adverse credit mortgages.
Remember, you don’t need a perfect credit rating to get a mortgage. Every provider has their own eligibility criteria, and just because one lender rejects your application, it doesn’t mean other lenders will.
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What do mortgage lenders look for?
When you apply for a mortgage, most high street lenders assess the same key factors to determine your eligibility, including:
Annual income
If you’re employed, you’ll need to provide at least three to six months’ worth of payslips to prove you can afford monthly mortgage payments. Lenders will also look beyond your base salary, so they may consider other forms of income, such as bonuses, commission, second jobs, benefits, and child maintenance.
If you’re self-employed, you may need to provide up to two years of accounts to verify your income.
Spending habits
As well as your income, lenders will likely review your recent spending habits by looking at your bank statements for the last six months.
This is primarily to determine how much you spend on both essential and non-essential expenses each month and, as a result, how much you can afford to pay towards a mortgage.
Credit history
If you have any existing debts, these will also be taken into consideration when you apply for a mortgage. This includes things like credit cards, store cards, car finance, payday loans, and catalogues.
Simply having other credit agreements won’t hinder your chances of getting a mortgage, provided you make all payments in full and on time.
Lenders must be confident that you can not only afford the mortgage now, but that you’ll be able to make the agreed payments for the duration of the term.
Does the type of default matter?
While all defaults technically look indistinguishable on your credit record, lenders will look into the reason behind the default, as well as how many defaults you have, when determining your mortgage eligibility.
Put simply, defaults issued against mortgage or other secured loans are usually viewed more seriously than defaults issued against small consumer debts, such as mobile phone contracts, payday loans, mail order accounts or credit cards.
Lenders also consider the age of the default. Generally, recent defaults pose more of a risk than older defaults, as they reflect your current financial situation.
How long after a default should I wait to start the mortgage process?
There is no fixed period that you should wait after a default before applying for a mortgage.
However, the good news is that you don’t always have to wait six years for a default to be automatically removed from your credit record to be approved.
Generally, trying to get a mortgage offer with newer and unsatisfied defaults will be difficult, but the more time that passes, the greater your chances of acceptance.
If the default is over two years old, for example, a good broker should be able to point you in the direction of specialist lenders who accept defaults.
Can I get a default removed from my credit file?
Usually, no.
However, while all defaults disappear from your credit report six years after the default date (not the date of the last missed payment), you may be able to get it removed sooner if you can provide sufficient evidence that proves it was issued in error or was a result of fraud.
If this has happened to you, you must contact the relevant credit reference agency and raise a credit report dispute. It's important to note that a default may not appear on all three credit reports from all three credit reference agencies, as lenders choose which to report to, so you should request a free copy of each credit report before reaching out.
The credit reference agency is legally required to investigate your dispute and may contact your original creditor to verify the source of the default.
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Will a default affect my remortgaging options?
As previously mentioned, a default can affect your ability to qualify for most credit products.
When you apply to remortgage, the same underwriting process will be carried out to ensure you can afford your new repayments. If a lender discovers a default during a credit check, this may affect your chances of being accepted.
You may have greater success remortgaging with your existing lender (called a product transfer) instead of a mainstream lender, as this often requires fewer checks, but this will likely incur early repayment fees.
Before you apply to remortgage with a default, seek personalised mortgage advice from a mortgage advisor. They will review your current circumstances, including your existing financial commitments, and help you outline your available options.
Conclusion
Having defaults over two years old doesn’t automatically mean you’ll be rejected for a high street mortgage, but most lenders will view you as high risk, and you could face more limitations (e.g. a higher interest rate or longer repayment period).
However, many lenders are willing to consider applicants with settled defaults over two years old, especially if there have been no other debts, the default has since been satisfied, the default value is small (e.g. for a mobile phone bill), or you have no wider credit issues.
There are also many things you can do to improve your chances of getting a mortgage with a default, such as making current payments on time, paying a bigger deposit, and contacting a specialised broker with experience in helping individuals with bad credit find flexible lenders.
