Credit Building > Can you get a mortgage in principle with bad credit?

Can you get a mortgage in principle with bad credit?

Wollit Team3 minute read · Updated 4th July 2024

A mortgage in principle is a document that shows how much a lender is willing to let you borrow, and is an important step in your mortgage application process.

If you have a poor credit history, getting a mortgage in principle is possible, but it may come with some limitations and challenges.

What is a mortgage in principle?

A mortgage in principle, also known as an “agreement in principle” (AIP), is a document that shows how much a lender is willing to let you borrow based on a basic assessment of your finances.

It’s not a full mortgage offer, but it can give you a good idea of what you can borrow and help you stand out as a serious buyer when making an offer on a property.

To get a mortgage in principle, you’ll usually need to give the lender some basic information about your income, expenses, and how much you can afford to put down for a deposit.

The lender will then perform a soft credit check, which won’t leave a mark on your credit report. This means that getting an AIP won’t affect your credit score.

Can I get a mortgage in principle if I have bad credit?

The short answer is yes, you can get a mortgage in principle with bad credit, but it may be a bit more challenging.

Lenders will still go through your application, but they’ll likely take a closer look at your credit history and may have stricter requirements like a shorter repayment term or a larger deposit size. They might also offer you higher interest rates.

Here is how lenders may view your bad credit history:

Things like missed payments will be viewed as less worse than more serious issues like bankruptcy, defaults, CCJs, or home repossession.
The longer ago your credit problems occurred, the better.
If your credit issues have been solved, lenders will be more willing to accept your mortgage application. For example, when you defaulted but still eventually paid your debt.
Lenders may be more understanding if your problems were due to a one-off event, such as job loss or illness, rather than simply being an unreliable borrower. This is why it’s so important to add a Notice of Correction to your credit report, in which you can explain why an adverse credit event happened.
Being able to afford a larger deposit will also make lenders care less about your bad credit history. The same applies if your income has been steadily increasing.
Finally, lenders will also examine how your credit history has evolved. If you show signs that you have taken serious steps to improve your credit score and put your bad credit problems in the past, lenders will be much more likely to consider your mortgage application.

How do I improve my chances of getting a mortgage in principle if I have bad credit?

If you have bad credit, here is what you can do to improve your chances of getting a mortgage in principle:

Check your credit report regularly. Review your credit report from the three main credit reference agencies (Experian, Equifax, and TransUnion) so you can spot and remove any errors or outdated information.
Save a larger deposit.
Use a specialist mortgage broker who deals with bad credit mortgages.
Consider getting a guarantor. If you have a family member or friend with a good credit history willing to act as a guarantor, this can improve your chances of getting a mortgage in principle. Just be careful – being a guarantor can be quite risky for them and may harm their credit score if things go south.
Finally, work on improving your credit score. Register to vote, reduce debt levels, make all payments on time, and consider using a specialised credit builder tool.

What are the risks of getting a bad credit mortgage?

While getting a mortgage in principle with bad credit is possible, there are some potential drawbacks to be aware of:

Lenders may offer you a higher interest rate because they see you as riskier.
Lenders may also have more stringent requirements and ask for a larger deposit, higher income, and maybe even a guarantor.
You may have access to a smaller pool of lenders, as some may not be willing to offer mortgages to those with bad credit.

What are the alternatives to getting a bad credit mortgage in principle?

If you’re unable to get a mortgage in principle due to your bad credit, there are a few alternative options you could consider:

Rent-to-Buy schemes: These schemes allow you to rent a property with the option to buy it later, which can be a good way to rebuild your credit and save for a deposit.
Shared ownership: With a shared ownership scheme, you buy a share of a property (usually between 25% and 75%) and pay rent on the remaining share. This can be a more affordable route to homeownership if you have bad credit.
Or wait and keep working on your credit score to get a better mortgage.

The good news is that many apps can help you build and improve credit.

One such app is Wollit. Wollit works by reporting a fixed-fee monthly subscription as a loan repayment to all credit reference agencies. This helps you build a history of timely debt repayments, which is the main factor that matters for your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders you pay your bills on time, helping you make the most of your rent while you prepare to become a homeowner.