Bad Credit Mortgages: The Rebirth of Specialist Lending

January 21, 2019

Your credit score is an important aspect of your financial life. It shows lenders the possibilities that you’ll pay back the money you borrow. A high score is what everyone expects, while a low credit score popularly referred to as “bad credit,” can make you ineligible for any reasonable loan.

The credit score that’s required for a mortgage boils down to the type of loan you’re most interested in. Government-backed loan programs—, USDA and VA — generally permit lower credit-score requirements than conventional or private mortgages. That said, it’s the lender who ultimately makes the final decision; he decides the minimum credit score to allow for each loan product.

Some lenders could demand a higher down payment if your credit score is within their minimum. Also, lenders could ask that you pay more fees and higher interest rate. Sadly, because of the bad credit, you might pay more for your home loan eventually.

You can fix these penalties, by elevating your credit score before applying for the loan. If your credit score is less-than-ideal, you need a lender who’s ready to take responsibility for that.

The rebirth of specialist lending

If you’ve been supporting the industry, you’ll vividly remember the UK financial crisis of 2007/2008. This was followed by the subsequent market crash which halted the UK specialist or subprime mortgage lending market. Before the crash, the lending market had reportedly increased to over 10% of the sector. They also experienced the most growth when it comes to gross lending.

Source: UK Finance

Initially, the crisis softened the US property market of 2006/2007, with smart investors in mortgage-backed securities getting worried over the value and quality of the products they had invested millions of dollars on.

These concerns were warranted because it was evident that institutional greed, personal and occasional fraudulent processes, had permitted a lot of easy money to flow to clients who in many ways had no effective or reliable repayment method.

Lenders were not fact-checking the credit scores before approving loans. It was approved with minimal underwriting; income checking and even the property valuation were not correctly executed.

The ultimate target was borrowers who were enticed with interest-only loans which required low monthly payments, even though the loan balance never reduced.

There were no preliminary rate deals or and no upfront costs. This significantly increased the rates quickly before what borrowers can reasonably afford.

You’ll often find individual mortgages being bundled together into multi-billion dollar bonds and sold with a top level, triple-A safety rating mostly to private investors.

These securities were not as safe for investors who were led to believe that they were, and since borrowers were unable to pay created a web of uncertainty, and of course, they soon started to default on their loans.

There was panic everywhere and banks which could not contain the direction of their own investments along with those of their partners stopped lending to borrowers, thus making it more difficult in obtaining business funding. Sadly, home buyers and homeowners struggled much harder to invest in property. This resulted in cash liquidity which quickly dried up.

From the US, the crisis had a multiplier-effect worldwide and mushroomed into giant waves as they penetrated UK shores in 2007/2008. It was clear that our own specialist lending market had been treated more or less similar to that of the US.

As a result of the subsequent fallout, we witnessed the first run on a bank in a UK bank which has existed for the past 150 years. Depositors who were scared and concerned about the financial status of a prime UK mortgage lender demanded for their saving. They began queuing outside branches in the country to get their hard-earned savings back.

During the property boom, Northern Rock had lent much larger sums than it received from its own savers — having expanded its operations and achieved dramatic revenue growth.

The shortfall received funding by borrowing from other banks, but as soon as these banks stopped lending, Northern Rock couldn’t continue trading correctly. The aftermath of the crisis was that US investment bank Lehman Brothers, who invested hundreds of millions of dollars in mortgage-backed securities, collapsed.

This led to a forced merger between the several UK and worldwide banks. Some of the banks were sold or became a part or fully owned by the government. There’s more, governments took the initiative to borrow hundreds of billions of pounds/dollars, in a bid to revive the financial system to stop infirm banks and economies.

10 years on…

A lot has happened in the subsequent years since the crisis. The subprime lending sector has gradually made its way back to the UK, though not as large as it used to be.

The clients who since 2007/2008 were not permitted in the finance borrowing as a result of their bad credit issues, unusual property types, complex income streams, or who were not a good fit, are now quite eligible to access funding options.

Although underwriting is always encouraged by lenders to avoid making the same mistakes that led to a crisis. Also, the loan size with respect to the value of the security (i.e., Loan to value ratios), are lower than before the market crash. Credit scores are not scrutinized, property valuations are corrected completed, and income and affordability is property analysed before any loan is approved.

Mortgage-backed securities which are by-products of grouping and selling loans have also returned but it’s no longer business as usual — investors now understand what they’re buying and the processes involved.

Grouping and selling the loans into mortgage-backed securities has also returned but this time investors are clear about what they are buying.

Industry stalwarts hope that the much-needed specialist lending grows and remains but constant improvement is needed especially if the prudent constraints that are currently in place today aren’t lifted. We can only hope for a much brighter lending market in the foreseeable future.

Should I apply for a bad credit mortgage?

Yes, you have provable options available out there, which means you can apply for a specialist bad credit mortgage. Do expect that this will definitely have a higher interest rate. More so, repairing your credit score can get you eligible by a high street lender which usually demands lower interest rates. Your choice, in the end, depends entirely on your circumstances.

As you might expect, most specialist bad credit lenders require applications that showcase your credit history.

Precise mortgages, for example, would require credit scores with defaults and CCJs just three months after they occurred. On the other hand, larger high street lender Coventry Building Society said it considers someone with default payments from three months eligible. So, with your circumstances in check — you should still shop around for better options using mortgage comparison sites and financial websites offering advice.

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