In the previous article ‘Bad Credit Mortgage – Know Your Stuff’ Part 1, we looked at what a bad credit mortgage is and briefly looked at the differences between a ‘normal mortgage’ and a ‘bad credit mortgage’, in this article we are going to look at what could cause someone to have bad credit.
There are a plenty of reasons why adverse credit comes about and why someone with adverse credit would want to mortgage, and there are a huge number of lenders wanting to lend and specialist brokers able to offer excellent advice with their client’s best interest at heart, any broker who has spent more than a few years in the sub prime market will be familiar with the examples below of how bad credit comes about.
In no particular order:
- Forced redundancy or drop in salary I come across this more than I would like to, through no fault of the borrower their income has been reduced, less money coming in means less money to service bills which can result in payments being missed, thankfully a lot of the people I speak to who have experienced this have managed to increase their income, but the damage to their credit has already been done.
- Death or major illness in the family This is not as common but we have come across it, understandably everything else takes a back seat including paying the bills.
- Separation or divorce Obvious to see why this would have a major impact on finances resulting in credit problems, especially if there are joint bank accounts, joint loans etc.
- Self employment Being self employed can seem like a dream come true for many, the reality is that most people underestimate the work involved and the time it takes to generate sustainable income streams, the early months or years can often see peoples credit suffering whilst a new business is getting off the ground.
- People simply take on too much debt Whilst this is a legitimate reason, I have found that most people were able to service the debts when they took them out, but something happened, hence they took on too much (in hindsight they probably wouldn’t have). There are obviously people who just keep stacking up debt after debt after debt and to hell with the consequences until they get to the point that they can no longer service the repayments and, whilst I understand the reasoning behind the sayings ‘they just kept approving my loans and credit cards’ or ‘the lender pushed it on me’, I would suggest that common sense be brought into the equation, I am all for a sympathetic ear but sorry folks, we have to draw the line somewhere.
- You may be classed as a ‘non-standard credit risk’ According to Datamonitor, the independent market analyst, at least one in five adults in the UK are said to be non-standard. They may include the self-employed, unable to provide sufficient proof of income or people who have an outstanding county court judgment (CCJ) against them or have had their homes repossessed for non-payment of mortgage or some other form of bad credit.
From my experience the above would cover the main reasons someone may have credit problems. Looking at it deeper, such as the individual types of bad credit (defaults, CCJ’s etc) would take away from what we are trying to do here; whilst one or two of the situations may be familiar to you its blatantly obvious that no one article can cover all occurrences, however you may benefit from reading the article to follow which focuses on how your credit problems may be viewed by the lender and how the ‘credit crunch’ has generally effected the adverse credit mortgage products throughout the UK, we will briefly be covering the different types of impaired credit and how they may restrict any borrowing for mortgage purposes.