Getting a mortgage after bankruptcy might sound impossible, but it’s more common than you think. Life happens, and many people face financial setbacks that lead to bankruptcy.
The good news is that a fresh start is possible, including repurchasing a home. In this article, we’ll explore how you can navigate the road to homeownership after bankruptcy, what lenders look for, and some tips to improve your chances of getting approved.
Table of Contents
MORE
LESS
Can You Get A Mortgage After Bankruptcy?
Getting a mortgage after bankruptcy might be difficult, but not impossible. You won’t get approved for a standard mortgage deal if bankruptcy is shown on your credit report or a County Court Judgement (CCJ) is filed against you.
However, some mortgage lenders approve loans for people with bankruptcy records, but you have to make a large initial deposit and pay a high interest rate compared to people with a good credit score.
Usually, the lenders don’t advertise the interest rate for people with bad credit scores. They consider the application individually and decide the rate based on the individual circumstances.
Below are some factors the lenders take into account:
- Value of the mortgage.
- The initial amount you’re willing to pay.
- Outstanding credit issues, their types, and how recent they are.
If you make the repayments on time your credit score may increase over time. Then, you can remortgage to a better deal.
Is there any way to rebuild your financial standing, improve your credit score, and get a mortgage? Yes, definitely. Read the next sections to find out how you can do that.
Steps To Secure A Mortgage After Bankruptcy
Source: MoneySavingExpert
Similar to the above post, many of us wonder how to get a mortgage when there’s a bankruptcy record. Below are some practical steps to secure a mortgage after bankruptcy.
The first step towards getting a mortgage after bankruptcy is to check your credit report. This allows you to correct any errors and understand your current credit standing. You can access your credit history free from agencies like Experian, Equifax, and TransUnion.
Rebuilding your credit score involves paying bills on time, reducing credit card balances, and avoiding new debt. Additionally, keep your credit utilisation ratio low, ideally below 30%.
Lenders view discharged bankrupts as high-risk borrowers. To mitigate this risk, they often require a larger deposit.
The amount varies depending on several factors, but here’s a rough value for the estimated deposit needed for different times discharged from bankruptcy:
- Less than a year discharged: 40%
- One year: 25-30%
- Two years: 15-20%
- Three years or more: 5-10%
If you’re looking at a £250,000 property, you could need a deposit of £12,500 to £100,000. Saving such a significant amount might seem daunting, but it’s a crucial step.
Below are some tips for saving:
- Create a Budget: Track your income and expenses to find areas to save.
- Cut Unnecessary Costs: Reduce spending on non-essential items.
- Set Savings Goals: Establish clear, achievable savings targets.
- Automate Savings: Set up automatic transfers to your savings account.
If you need guidance to manage your finances and get over debt, contact us.
Are you struggling with unaffordable debt?
- Affordable repayments
- Reduce Pressure from people you owe
- One simple monthly payment
Getting a mortgage after bankruptcy is a complex process and a mortgage broker can guide you to get one.
Mortgage brokers have a network of specialist lenders willing to work with discharged bankrupts. London & Country Mortgages Ltd (L&C) is one such broker offering free advice.
Brokers can also help you understand the requirements and identify the best mortgage options. Below are the benefits of hiring a mortgage broker:
- Brokers have extensive knowledge of the market, so they can help you choose the best solution.
- They can connect you easily with lenders who specialise in post-bankruptcy mortgages.
- You can save your time and stay stress-free as the broker will handle most of your paperwork.
Lenders will check for your income and spending. Hence, you must ensure that your finances are in order before applying.
Why? Having stable finances shows the lender that you are a low-risk borrower despite having a bankruptcy record.
How would you demonstrate your financial stability to the lender?
- Maintain steady employment for the long term. Stable employment is a positive signal to lenders.
- Keep your monthly outgoings reasonable and within your income.
- Have savings set aside for emergencies and build an emergency fund to show financial prudence.
Bankruptcy is removed from your credit report after six years of your discharge. If you can afford it, wait until the bankruptcy record is removed to apply for a mortgage.
In the meantime, focus on improving your credit score and saving for a deposit.
With a high credit score, you’ll be able to secure a mortgage with a low interest rate and you have enough time to save up for a larger deposit.
What are the types of bankruptcies in the UK and how would they affect your ability to secure a mortgage similarly? Read the next section to find out.
3 Types Of Bankruptcies UK
Chapter 7, chapter 11, and chapter 13 are the main three types of bankruptcies in the UK. Let’s look into them in detail.
- Chapter 7 bankruptcy
Chapter 7 bankruptcy can be applied by businesses and individuals. This lasts only for a few months and within this period, your assets will be liquidated to pay the creditors.
You must have a median income less than the amount specified to be eligible for this. You’ll lose your assets but all your debts will be paid and you can get a fresh financial start.
- Chapter 11 bankruptcy
Chapter 11 bankruptcy is for businesses and not for individuals. Here the company directors will hand over all the decision-making powers to the bankruptcy court’s jurisdiction.
They will restructure and reorganise your business to save it. You may have to pay for the court and administration fees, however, you’ll be able to be free from the creditors and ultimately save your business from closing.
- Chapter 13 bankruptcy
Chapter 13 bankruptcy is only for individuals and not for companies. Your debts must fall below a certain amount to be eligible for this. A trustee will look after your finances for this period and you’ll be asked to make repayments based on your financial situation.
Is bankruptcy the right solution for you? Bankruptcy affects your chances of securing a mortgage but it has benefits too.
You must weigh the pros and cons carefully to make the right decision. So, let’s look into the pros and cons of bankruptcy briefly.
Pros And Cons Of Bankruptcies UK
Below are the benefits and downsides of declaring bankruptcy.
- You get an opportunity to start your finances fresh as bankruptcy clears most of your unsecured debts such as personal loans, utility bills, credit card balances, etc.
- You won’t be chased by the creditor anymore which can give you immense peace of mind.
- You are allowed to keep essential assets including household furniture, tools required for employment, personal items, etc.
- A trustee will gain control over all your assets.
- Impacts your credit rating negatively.
- You’ll be placed under some restrictions. For example, you are not allowed to operate a business without the court’s permission and you can’t get a loan beyond a certain amount for the period you are under bankruptcy.
- You cannot act as a company director and bankruptcy may affect some careers in the financial sector field.
If you think bankruptcy is not the right solution, don’t overstress. There are many other debt solutions you can consider. Let’s look into them in the next section.
Alternatives For Bankruptcy
Individual Voluntary Agreement (IVA): IVA is a formal agreement with your creditor to pay back your debts within 5-6 years by making regular monthly payments. This is suitable for people who can afford regular payments, but want their debts consolidated.
You must wait 6 years to apply for a mortgage if you obtain an IVA. However, you can get a mortgage from a specialist lender with a comparatively higher interest rate and a larger initial deposit.
Debt Relief Orders (DRO): DRO is a solution to deal with personal debts you cannot afford and start fresh. Your debt will be frozen for 12 months and it will be forgiven after 12 months sometimes.
Suitable for those with low debts, little spare income, and few assets. DROs typically apply to individuals with less than £20,000 in debt, minimal savings, and no significant assets like a home.
Debt Management Plan (DMP): DMP is an agreement between you and your creditor to pay off all your debts in small monthly instalments or make repayments after some months if you are in a financial crisis.
IVA, DRO, and DMP also have benefits, and downsides and impact your chance of securing a mortgage. If you’re unsure which debt solution to choose, contact a debt charity or a debt advisor.
Below are some debt charities in the UK where you can get debt advice for free:
- StepChange.
- Citizens Advice
- National Debtline
Tips For Getting A Mortgage After Bankruptcy
- Build your credit score gradually by paying bills on time and managing your expenses.
- Explain to the lender why you chose bankruptcy, your financial situation, and the steps you are following to improve your credit score.
- Try obtaining a guarantor mortgage by enlisting a family member or a friend.
- Speak with a mortgage broker about your circumstances and get advice on the next steps.
- If you can pay more as an initial deposit, it’s more likely that you’ll secure a mortgage. So, save up for a large deposit.
- In case you’re unable to buy a big property as you dreamt of, opt for a cheaper property.
- If you are buying a home along with your partner, consider both of your credit scores and focus on improving if it’s less.
Conclusion
Securing a mortgage after bankruptcy is challenging but possible. By understanding the types of bankruptcies in the UK, how long bankruptcy lasts, and the pros and cons of bankruptcy, you can navigate this complex journey.
Rebuilding your credit score, saving for a larger deposit, using a mortgage broker, and improving your financial stability are critical steps to secure a mortgage after bankruptcy. For more debt guidance and solutions fill out our online form and our Money Advisor team will guide you.
Key Points
- You can get a mortgage after bankruptcy, but you’ll have to pay high interest rates and make higher initial deposits.
- Bankruptcy lasts 12 months but remains on your credit file for six years, impacting your ability to secure a mortgage.
- You must rebuild your credit score to obtain a mortgage easily. You can do this by correcting any errors on the credit report and paying bills on time.
- Bankruptcy can clear your debts and provide a fresh start but significantly damages your credit score and may require selling valuable assets.
- You must save a larger deposit, varying from 5% to 40%, depending on how long you’ve been discharged from bankruptcy.
- Brokers can help you find specialist lenders willing to work with discharged bankrupts and provide valuable advice on navigating the mortgage application process.
- Demonstrate financial stability through steady employment, manageable expenses, and building an emergency fund to improve your chances of mortgage approval.
- Waiting until your bankruptcy is removed from your credit file (after six years) can improve your credit score and mortgage terms.
- Consult with mortgage brokers for expert guidance and access to a network of specialist lenders who understand the challenges of post-bankruptcy mortgages.
FAQs
Some lenders might consider your application immediately after discharge, but most prefer at least 12 months. The longer you wait, the better your chances of securing a favourable mortgage. This waiting period allows you to rebuild your credit and demonstrate financial stability.
Not necessarily. Initially, you might face higher interest rates, but if you maintain timely payments, your credit score will improve. This can eventually qualify you for remortgaging with better rates from conventional lenders.
Waiting allows you to improve your credit score and save for a larger deposit, potentially securing better mortgage terms. However, it also means delaying home ownership. This decision depends on your financial situation and plans.
Bankruptcy usually lasts 12 months in the UK, but its impact on your credit file can linger for six years.
