Buy-to-Let Mortgages with Bad Credit

Buy to Let Mortgages with Bad Credit

For those looking to invest in rental property but struggling with poor credit, the idea of obtaining a buy-to-let mortgage might seem daunting. However, it’s not impossible. Many UK lenders are willing to work with applicants who have bad credit, provided certain conditions are met. This guide will walk you through the process, highlight key considerations, and provide a list of lenders who may be able to help.

Applying without knowing if you will be accepted can incur costs, so it’s essential to research and prepare thoroughly. This guide will walk you through the process, highlight key considerations, and provide a list of lenders who may be able to help, including those who specialize in adverse credit buy scenarios and secured credit issues.

What is a Buy-to-Let Mortgage?

A buy-to-let mortgage is specifically designed for individuals looking to purchase property as an investment to rent out. Unlike residential mortgages, buy-to-let mortgages focus on the potential rental income rather than just the borrower’s personal income. Many lenders prioritise the anticipated rental income over the applicant’s personal earnings when assessing eligibility.

Can You Get a Buy-to-Let Mortgage with Bad Credit?

The short answer is yes, but the journey might require extra effort. Lenders assess risk when evaluating mortgage applications. Bad credit issues such as County Court Judgements (CCJs), defaults, missed payments, or bankruptcy can signal higher risk, causing some lenders to reject applications outright.

The timing of credit issues impacts lender decisions, the older issues often weigh less in evaluations, while recent problems may carry more significance. However, specialist lenders exist who cater to individuals with adverse credit histories. Bad credit lenders, unlike mainstream lenders, are more willing to consider applicants with credit problems and can offer tailored solutions for those with a history of adverse credit.

 Steps to Secure a Buy-to-Let Mortgage with Bad Credit

1. Assess Your Credit Report Start by obtaining a copy of your credit report from agencies like Experian, Equifax, or TransUnion. Understanding your credit issues helps you identify what needs addressing and prepare for lender questions. A credit check is a crucial part of the process, as lenders use it to assess your risk profile and determine your eligibility.
2. Work on Improving Your Credit Score While applying with bad credit is possible, improving your score can increase your chances of approval and help you secure better terms. If you have a low credit score or poor credit rating, taking steps to improve it can make a significant difference.

   Steps to take include:

   • Ensuring all accounts are up to date.
   • Resolving any disputes on your report.
   • Reducing outstanding debt.
3. Save for a Larger Deposit Lenders offering bad credit buy-to-let mortgages often require larger deposits, typically ranging from 20% to 40% of the property’s value. A higher deposit reduces the lender’s risk and may improve your approval chances. Knowing how much deposit is required is essential, as it directly affects your mortgage options.
4. Use a Mortgage Broker A broker specialising in bad credit mortgages can identify lenders most likely to approve your application. Brokers often have access to exclusive deals unavailable directly to consumers and can assist with adverse credit buy situations by matching you with the right lender.
5. Prepare Supporting Documents Ensure you have all required documents ready, including proof of income, rental yield estimates, and details of your bad credit history. Transparency about your financial situation helps build trust with lenders.
6. Focus on Rental Yield Rental yield plays a significant role in buy-to-let applications. Lenders typically look for rental income to cover 125%-145% of the mortgage repayment amount. Make sure the rental yield is sufficient to cover your monthly payments.

Adverse credit events such as defaults, CCJs, missed payments, mortgage arrears, and other credit problems can affect your eligibility for a buy-to-let mortgage. Lenders will consider the type, severity, and timing of these events when making a decision, but specialist lenders may still offer solutions tailored to your situation. Adverse credit histories are evaluated based on the applicant’s improved financial management since the event, so demonstrating progress can positively influence lender decisions.

Which Lenders Offer Buy-to-Let Mortgages with Bad Credit?

1. Specialist Lenders
   • Kensington Mortgages: Known for flexible underwriting, Kensington considers applicants with a history of CCJs or defaults.
   • Precise Mortgages: Offers products tailored to those with adverse credit and assesses applications individually.
   • The Mortgage Lender: Caters to applicants with a range of credit issues, including recent bad credit events.
2. High-Street Lenders
   • Some high-street lenders, such as NatWest or Santander, may consider applicants with minor or older credit issues, though the criteria are stricter.
3. Building Societies
   • Building societies like Aldermore and Vida Homeloans often cater to niche markets, including bad credit applicants. They’re known for a more personalized approach to underwriting.

Mainstream lenders and most lenders are less likely to approve applicants with credit problems, especially if there are recent adverse credit events. Missed mortgage payments in the last 3 months typically hinder the ability to obtain a new mortgage, as they are seen as a sign of ongoing financial instability.

As your credit improves and you have fewer issues, more lenders become available, increasing your options and potentially improving your mortgage terms. Bad credit lenders typically charge a higher interest rate and mortgage rates for applicants with poor credit histories, reflecting the increased risk.

Benefits of Buy-to-Let Mortgages with Bad Credit

• Access to Investment Opportunities: Despite bad credit, you can still enter the property investment market and generate rental income.
• Build Financial Stability: Successful property investment can help you improve your overall financial situation over time.
• Flexible Lenders: Specialist lenders are often more understanding of unique circumstances.

• Experienced landlord and experienced landlords: Those with a track record in property investment may benefit from specialist products designed for portfolio landlords or those with complex credit histories.

 Challenges and Drawbacks

• Higher Interest Rates: Expect to pay higher interest rates compared to those with good credit.
• Larger Deposits: A significant upfront investment may be required.
• Limited Lender Options: Not all lenders cater to individuals with bad credit, limiting your choices.
• Interest only: Many buy-to-let mortgages are interest only, which can lower your monthly payments but means the capital is not repaid during the term.
• Additional Fees: Lenders may charge for valuation and product fees for bad credit buy-to-let mortgages, adding to the overall cost of securing a loan.

Eligibility Criteria for Buy-to-Let Mortgages with Bad Credit

Eligibility criteria vary by lender but typically include:

• Minimum Age: Usually 21 years old.
• Property Type: The property must be suitable for renting.
• Income Requirements: Many lenders require a minimum personal income, often around £25,000 per year.
• Rental Yield: Rental income must cover a significant portion of the mortgage repayment.
• Credit History: The severity and recency of credit issues are key factors.

The lending decision will take into account your credit problems, any credit issue such as late payments, missed payment, mortgage arrears, and whether you have had issues with secured credit. Other factors like a debt management plan or an individual voluntary arrangement (IVA) can also impact your eligibility, as lenders assess your overall financial profile and risk.

Applications with a debt management plan (DMP) can still succeed depending on the details of the arrangement, such as how long it has been in place and whether payments have been consistently made.

Tips for Success

• Be Honest: Fully disclose your credit history to avoid delays or complications.
• Show Financial Stability: Demonstrate that your finances have improved since your credit issues.
• Leverage a Broker’s Expertise: A broker can guide you to lenders that align with your circumstances.
• Manage your loans: Keeping up with payments on other loans and credit agreements can positively influence your application.
• Time landlord: If you are a first-time landlord, be aware that you may face additional scrutiny and stricter criteria from lenders.

Conclusion

Obtaining a buy-to-let mortgage with bad credit is challenging but achievable with the right preparation and guidance. Specialist lenders and some high-street banks are open to working with applicants with adverse credit histories, especially if you have a strong rental yield and a sizeable deposit. Working with a knowledgeable broker can streamline the process and increase your chances of success.

If you’re considering a buy-to-let mortgage with bad credit, take proactive steps to understand your financial situation, prepare your application, and explore your lender options. With determination and the right support, you can turn your property investment plans into reality.

Get help from an experienced mortgage broker

You can speak to one of our specialist mortgage brokers who would be able to guide you through the process. They will advise if there is a lender available and the maximum loan amount based on your circumstances. We are a whole of market mortgage brokerage with access to all lenders. Call us on 01332 470400 or complete the form with your details for us to give you a call back.

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