How do you get a mortgage with a very bad credit score

spanishgal_2

I dont know if this is the right forum to post this.Im really worried about a close friend of mine.They are purchasing their council house using the right to buy scheme, that would be fine but they are using a sub prime lender.Im concerned as I know my friend and her husband have a very bad credit history.They have rent and council tax arreas, have had a stat demand for a bank loan and lots of other bad debt.I dont know how they have managed to secure a mortgage (its with gmac).They are saying its ok as in 2 years when their fixed rate ends they can move to a prime lender.I thought you could only get a good mortgage rate with a prime lender if your credit score is good.Im worried they wont keep up repayments, they have kids and I would hate to see them homeless.Some of the mortgage money is for doing the house up, they also have 2 loans and catalogue debts are you allowed to have a mortgage with debts like this which arnt even being paid on a regular basis.I know they have used other names for some of their debt but surely a credit search would show these at their address.I think they even use their childrens names to get debt.

dannyboycey

Why are they trying to 'buy'? I very much doubt it will save them any money.

BrandNewDay

It does sound like their lender is crazy for taking the chance. But it's their problem, not yours. I don't mean that in a snarky way: you sound genuinely worried for them and I don't think you should. The worst that will happen is that your friends lose this house and end up homeless, therefor BACK in a council house. Right?

We took out a subprime mortgage. My husband has a bankruptcy in his history. (However, no late payments ever, or any other black marks.) We, too, assumed that in two years we'll be able to re-mortgage with a mainstream lender. I am now no longer sure of that. I think that in two years time, lenders will be much more cautious and we'll STILL be at least sup-prime, if not untouchable.

For that reason, we have not borrowed more than we can afford on one income, assuming a drastic increase in interest rates.

JasonLVC

Sounds like your friends have been sucked into the glossy adverts of council house ownership. Firstly, the council will only sell the house once they clear their arrears - which lenders usually let you add onto the mortgage.

In answer to your question, anyone more or less can get a mortgage or loan. Mortgages are easier as the debt is secured against the property so non-payment means banks get the house. As right to buy properties are undervalued and then have a discount taken off as well, lenders are happy to lend say £60k on a house that's really worth £90k as if homeowner doesn;t pay up, the bank gets the house and makes a very tidy £30k profit overnight.

2-3 years may be enough to start to tidy up a poor credit rating but it's not an automatic thing and scoring can go much further back than that, it means your friends will have to clear all their debts and not enter into new ones to maintain that 'clean' bill of health. As most credit scores are also address related, it is possible that there is too much debt in the household as it is for a morgage to be offered.

If they have been using false names and that of children then they are clearly committing fraud which is a criminal offence. The mortgage lender is unlikely to lend to someone with that level of debt at the moment (what with the sub-prime maket being under the microscope at present), but there will always be one lender prepared to lend, no matter what the risks. The risk here of course is that a credit check for a mortgage is more thorough and may expose your friends fraudulant loans, etc.

A tenant who buys under Right to Buy and then loses the property to the bank will not be eligible for counil re-housing at all as they will be considered to be deliberately homeless (by not paying the bills) and the council has zero obligation to house them, even if they have 50 kids.

It really sounds like your friends should not buy the house. Right to Buy will not disappear and they'll always get a great deal under the scheme. If they think they can buy their way out of debt by doing up a house and selling it, remember that they cannot sell for 5 years without paying back their discount...and that's a longtime to realise the capital profit in the property all the while paying a mortgage.

Good luck with them!.

BrandNewDay

JasonLVC wrote: »

A tenant who buys under Right to Buy and then loses the property to the bank will not be eligible for counil re-housing at all as they will be considered to be deliberately homeless (by not paying the bills) and the council has zero obligation to house them, even if they have 50 kids.

I didn't know this! :eek:

spanishgal_2

Thanks everyone.Dannyboyce - I think they want to buy as they always want what everyone else has got.Lots of friends including myself have bought our houses but we have good jobs, good credit history and did not have any other way of getting on the housing ladder.I bought my house for a steal of £40000 eleven years ago its now worth £120000.They will be worse off with a mortgage their council rent is £50 per week apparantly new mortgage will be £500 per month plus insurances.They are relying on the fact they will not touch husbands wages at all.I dont think they will improve their credit rating they are never happy with what they have, they always want what everyone else has got.Thanks everyond for your replies, I guess il just have to leave them to it, I beleive they know what they are getting into.

JasonLVC

Just an example of how mortgages are a masive debt commitment for anyone be they rich or poor :-

House valued at £60,000 after discounts. Assuming a 100% mortgage (ie, no deposit) over the standard 25 years mortgage term :-

£60,000 @ 6.5%apr = £405 p/month or £121,356 over the 25 years - that's roughly double what was originally borrowed.

£60,000 @ 9%apr = £503.52 p/month or £151,056 over 25 the years - more than double now.

Sub-prime is normally over a longer period, so we'll now say it is still £60,000 but over 30 years (as this will reduce the monthly repayments) :-

£60,000 @ 9%apr = £482.77 p/month or £173,797 over the 30 years - that's nearly three times what was originally borrowed.

If an additional amount is therefore taken out to consolidate other loans (say £10k to clear up all other debts), then now its £70,00 * 9%apr = £562.34 p/month or £202,766 over the full term.

Perhapds if you print this out and give to your friends they may see the qute terrifying debt that lies before them.

JasonLVC

BrandNewDay wrote: »

I didn't know this! :eek:

It is possible to get back onto the waiting list provided you can demonstrate that it was not your fault. So for instance, if you lose your job, that could cause you to not pay your mortgage. The council would want to see that you've tried to seek alternative employment. Just claiming dole would not be enough, but obtaining lower paid employment would start to edge it your way.

If you've been permanently disabled in a road accident say, then that is alright (from a housing point of view!) and you can get back onto the list as that is not your fault so to speak.

But to simply get into debt via loans, store cards, etc and then the bank forcloses - the council will simply say you've deliberatly made yourself homeless and the council's statutory duty to house homeless people no logner comes into play.

dannyboycey

spanishgal wrote: »

Thanks everyone.Dannyboyce - I think they want to buy as they always want what everyone else has got.Lots of friends including myself have bought our houses but we have good jobs, good credit history

Patience and humility are both virtues that could save them a hell of a lot. Tell them to consider holding off for a year or two, paying off debts and rebuilding their credit score. If they don't listen, it really is their problem. Keeping up with the Jones's can land you in a whole lot of trouble if you're not careful!