Finding it difficult to get a mortgage?

Thursday, October 18, 2007

There are numerous ways in which consumers can receive an adverse credit rating and, once they have one, they can find it very hard to get a mortgage with a mainstream lender. So how do people end up with adverse credit, why is this on the increase, and how can specialist lenders help?

The most common form of adverse credit is a County Court Judgement (CCJ). A CCJ is a claim against someone for money they owe that has been made official by the county court and remains on an individual’s credit rating for up to six years. It sounds like a big deal and in some instances CCJs can be issued because a borrower has built up a sizeable amount of unpaid debt.

However, a CCJ can also be issued for minor discrepancies such as missing a utility payment, a parking ticket or an unpaid mobile phone bill or if someone does not settle the debt once they have received a court summons.

Mortgage arrears are also increasingly common among people who are generally regarded as credit worthy, but miss mortgage repayments because of a life changing event. If there was a misconception that specialist residential mortgage borrowers are associated with lower income groups, then it has been dispelled by the latest report into the market by Datamonitor in June 2006, which says research has revealed that specialist residential borrowers are actually rather similar to mainstream mortgage borrowers.

Many lenders interviewed for the purpose of the Datamonitor report agreed with the fact that the specialist residential borrower is more likely to be someone who, at some point in their life, has experienced a life changing event such as divorce, temporary unemployment and sickness, which has resulted in a financial blip. While, although the Office of National Statistics says the number of divorces fell in 2005 by 8%, there were still 141,750 divorces in the UK in 2005, which is not an inconsiderable amount.

Divorce naturally dents the finances of people who go through the process and in many cases solicitors may instruct both parties in a divorce to cease payments until a settlement is reached, so couples experiencing divorce may naturally fall into arrears.

Redundancy is another life changing event that can happen to anyone and have a profound impact on their credit rating. Every economic market goes through cycles where there will be upward and downward trends, and this includes the labour market. So when there are downward trends they will generally be followed by an upward trend and many workers who lose their job during a downward trend could expect to benefit from a subsequent upward trend when they are looking for new employments.

This is something that lenders have experience of. They have built robust business plans in order to adapt to changing economic cycles and people who have experienced redundancy can benefit from the fact that specialist lenders will look at someone’s potential to pay in the future rather than a financial blip they have experienced in the past.

Personal insolvencies have also been increasing at an average rate of 13.5% each year since 1999. And, according to official statistics from the Department of Trade and Industry (DTI), individual insolvencies in 2005 increased 29.2% on 2004.

DTI figures also indicate that the number of people taking out Individual Voluntary Agreements (IVAs) is on the increase, with their number rising by 88.9% in 2005. This is because, as part of the 2002 Enterprise Act, the Government made changes to bankruptcy law that became effective from April last year 2005.

The changes were intended to help failed entrepreneurs get back on their feet quickly if their business collapsed but they also meant that it is far easier for individual consumers to declare bankruptcy as the new rules allow people to have their debts discharged after one year rather than three. Indeed, in the late 1990s, 60% of all bankruptcies concerned a failed business. Now, around 60% are caused by consumer debt.

Taking into account the growing number of CCJs, divorces, unemployed and bankruptcies it is clear to see that there is an increasing band of people who want to own their own property, are willing and able to do so but are denied the opportunity because circumstances beyond their control have affected their credit history.

The adverse credit market is an area where mortgage brokers can make a real difference and help a growing number of borrowers. At Solution Mortgages we are proactive in finding customers with less than perfect credit histories and helping them get the mortgage that they deserve. We can find solutions for people with CCJs, arrears and defaults.