How a 2nd Chance Mortgage Can Get You On The Property Ladder
If you’re reading this, the likelihood is that you’re desperate for a mortgage, but have been declined by one or more lenders in the past.
If so, you’ve come to the right place, and the good news is that there are options out there available to you.
A second chance mortgage programme could be the solution to getting your foot on the first rung of the property ladder.
Lenders and second chance mortgages
When it comes to lenders, each will have their own variables to consider when assessing your mortgage eligibility.
For example, if you have a history of poor credit and were to approach a single bank, it’s highly unlikely that you’ll find the right one to suit your circumstances, especially as many lenders deal exclusively with brokers.
But that doesn’t mean every lender will reject your application.
Even if you work with a broker you are restricted in the sense that you will only receive quotes from lenders they have access to; which may be a limited panel or not truly whole-of-market.
In short, it’s very unlikely that the entire market has been searched to assess your eligibility.
This is where we come in. The advisors we work with have specialist knowledge covering a whole range of circumstances to help obtain a positive outcome.
In this article we discuss some of the most common reasons for declined mortgage applications:
What Is a 2nd Chance Mortgage?
First off, what exactly is a second chance mortgage? A second chance mortgage is a way for people who may have had poor credit in the past or been recently declined a mortgage, and are desperate to get back onto the property ladder.
Rebuild your credit rating
They are most commonly distributed to those with a poor credit history and this is an excellent way to repair your credit rating.
Some people think of it as a “last chance”, or emergency mortgage option. Second chance loans give you the chance to rebuild your credit history and therefore be more attractive to lenders in the future.
These loans tend to have higher interest rates than conventional loans, as the lender needs to be compensated for taking on more risk.
On large, long-term loans like mortgages, the additional interest can be huge by the time the life of the loan is up.
For this reason, second chance mortgages tend to be a last resort option. However, once you have re-established your credit rating, you can always apply for a remortgage with more mainstream deal with a lower interest rate.
Adverse credit issues
The term “adverse credit” describes someone with a poor credit history or credit issues. Every time you take out a credit product, such as a loan, credit card, or even a mobile phone contract, it is reported to the credit reference agencies.
Below is a list of potential credit issues you may be faced with as a borrower if you’ve ever experienced any of these:
- Adverse credit overview
- Low credit score
- Mortgage Arrears
- County Court Judgements (CCJs)
- Individual Voluntary Arrangements (IVAs)
- Debt Management Plans (DMPs)
Each month, your lenders will report to these agencies whether you have made the correct payments on time and in full.
Provided you keep up with your payments for each of your credit agreements you will have a clean credit history and will appear more favourable to lenders.
However, if you’ve missed or been late with any repayments or had any other credit issues, it can stay with you for up to six years.
When you apply for a mortgage, second chance mortgage lenders will check your credit history.
While the odd late payment shouldn’t impact your chances with the majority of banks too much, if you’ve been declined by numerous lenders it’s likely that you’ve been in more serious financial difficulty in the past, but a 2nd chance mortgage or loan could help your situation in the future
It all comes down to risk. If you have a history of poor credit, then you are less likely to be accepted for an emergency mortgage than someone with a “one off” instance, say a missed mortgage or credit card payment.
The main factors are:
- What is the credit issue? (Late payment, default, bankruptcy etc)
- When was it registered?
- What type of account was it registered for? (Mortgage, credit card, unsecured loan etc)
- How much deposit/equity do you have?
At the moment there are a lot of lenders who will consider people with a poor credit history, even these with recent or quite severe issues.
Second chance refinance mortgages
Have you checked the whole mortgage market?
If you’ve been declined a remortgage on your main home, then you have a number of options open to you. Just because your current lender has said ‘no’ and you’re desperate for a mortgage, don’t worry, it doesn’t mean you can’t find a more sympathetic second chance mortgage company.
Each lender is different and has different criteria to assess a mortgage application, so it may just be a matter of finding the right lender, the mortgage experts we work with may be able to help you and create a positive outcome.
Have you considered a secured loan?
A second charge remortgage is a secured loan and lenders, especially 2nd charge lenders, tend to look more favourably on people because they have an existing home.
The thing to remember about second charge mortgages is that they are often much more flexible than a main mortgage, even if you’ve had credit issues in the past, or indeed want to borrow more than 5-6x income, as some will even go beyond 10x income in the right circumstances.
Your current income arrangements can play a big role in defining your eligibility for a mortgage, especially if combined with other issues mentioned here such as poor credit history.
Again, the greater the financial complications at play, the higher the risk, making it more likely that you’ll be declined by mainstream lenders and have to opt for a last chance mortgage programme. That’s the perfect time to give Online Mortgage Advisor a call on 0800 304 7880.
Maternity Leave Mortgages
For instance, getting a 2nd chance mortgage loan while on maternity leave can be difficult. This is because lenders assume (usually correctly!) that your income will decrease during your time away from work, and therefore won’t take your usual salary into account.
That being said, there are some out there who will consider you based on your full salary - provided your employer provides you with a reference.
Self Employed Mortgages
If you are a self employed applicant, it can be difficult to determine your eligibility because all lenders have different policies.
You should consider how the lender defines your eligibility:
- Number of years trading (some require 3 years, others will accept 1 year or even less)
- How they calculate income (some use an average over 3 years, other use last years figures)
- Which figures do they use? (most use salary and dividends, others share of profit)
- Maximum loan amount (some will cap at 3x income, some 4x or 5x, a few will even go 6x).
In addition, some lenders will look at your balance sheets over time to determine whether they will give you a mortgage. If they see a decline in profits over the years, this could inhibit your chances. If you are self employed, there are so many variables and the criteria changes so frequently that it is advisable to find a broker specialising in this area to guide you in the right direction.
What if I’m on commission or bonus payments?
Some lenders will take into account a bonus or commission as part of your assessment. Others may not.
Something to consider:
- Lenders will want a history of being paid a bonus or commission (some need a couple of years, some 12 months or even less – some may accept a contract for guaranteed commissions)
- The percentage of what they will accept (some will accept all of it, others 80% or less, some won’t accept any as part of your income)
- Commission/bonus lending cap (some lenders cap the amount of commission or bonus you earn).
It may be possible to increase your borrowing with some lenders who will take into account the additional income from sources such as:
- Child tax credits
- Child benefits
- Disability living allowance
- Maintenance payments
- Pension income
Every lender is different in what they will or will not approve, typically most lenders require borrowers on benefit income to also have an employed income, with the exception of DLA and pensions, which are considered more permanent.
Property structure issues
Non-traditional types of home builds can put you more at risk of being declined for a mortgage, as lenders may be worried about the future value/ability to sell the property, its structural integrity, and/or the risk of damage.
A traditional property will be made of bricks and mortar or stone, and have a slate or tiled roof.
There are a broad range of “unusual” construction types, including but not limited to those with thatched roofs, timber or metal framework, excessive glass, corrugated iron, listed buildings, prefabricated or concrete builds.
If you’ve been declined for a mortgage previously and your property falls into one of these categories, this may well have been a contributing factor, especially if combined with other issues.
Unusual constructions can seem a tempting prospect for buyers, but it is important to seek advice from an advisor in the early stages to talk about your mortgage options.
Lenders will require a valuation to be carried out on the property to ensure that it can act as suitable security.
This assessment will flag the construction type as well as identify any structural defects. Lenders will then use this information, alongside other factors, to decide whether or not they want to back you financially.
While not impossible to mortgage a non-standard property, there are likely to be caveats.
Most lenders will require that you have a larger deposit together and you may be charged higher interest rates to balance out the perceived risk.
While it isn’t definitive that an unusual property structure will mean, you are restricted to second chance mortgages, it does increase the risk, so think carefully before making any decisions, particularly if you have experienced other issues likely to inhibit your chances.
Deposit source issues
When you apply for a mortgage, every lender will ask you where you have sourced your deposit. Your response could have a considerable impact on whether your application is successful or not.
Lenders have strict anti-money laundering policies and regulations to follow to ensure your deposit comes from a reputable and legal source.
However, just because a previous application has been declined from one lender, doesn’t necessarily mean everyone will because policies vary from lender to lender.
In general, personal savings, investments, inheritance or gifts from family members (or other close, explainable sources) are accepted without question by most lenders.
Sale of another property or other assets aren’t usually a problem, provided the funds are from legitimate sources and the money is traceable.
The situation gets a bit trickier if you are financing your deposit from other sources. For example, unsecured borrowing (such as credit cards or personal loans) tends to be a big nono, as will deposit in the form of “gifts” from unexplainable sources or from overseas, due to the risk associated with money laundering.
This isn’t to say that your application will be automatically declined if your deposit comes from either of these sources, but the process can be more complicated due to the risk involved.
Other issues to consider if you’re desperate for a mortgage
Whether you’ve experienced adverse credit, income, property structure or deposit source issues (or a combination of the above), all variables will be further impacted depending on how recent and the frequency of each case, as well as how much deposit you have and whether your 2nd chance mortgage financing is for a residential or buy to let property.
Lenders will always look at you more favourably if you have a larger deposit, a higher income compared to what you’re borrowing and a clean credit history.
It’s all but impossible to give full guidance in print, as everyone is different and lenders judge borrowers on a case by case basis.
Whatever your circumstances, remember that there are options available.
If you like anything in this article or you’d like to know more, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry.
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