High street lenders can afford to be choosy in the current lending climate and if you have had a bad credit history during the last 5 years then watch for the computer to say no and your application being declined- Particularly if you are a first time buyer with a minimal deposit.
It's not totally the mortgage providers fault for this harsh criteria as it's more the case that they have now been forced to set the pass mark prohibitively high by the regulators even though it was the Financial Services Authority (the mortgage industry regulator) that were caught sleeping on the job in the run up to the subprime crisis and credit crunch.
Within the late nineties until the onset of the credit crunch, house prices had continuously boomed with double-digit per cent growth rates year on year and funders had to respond to this demand for greater value borrowing by improving the income multiples that they were using and easing lending criteria to enable them to deal with the significant demand created by new borrowers. Hindsight is a wonderful thing but unfortunately also about this time, to make sure that London became one of the foremost financial centres in the world, the Chancellor of the Exchequer, Gordon Brown introduced 'light touch' regulation for Banks and consequently the FSA paid little attention to the scant regard to prudent lending that mortgage providers were undertaking.
In the past, lenders would evaluate the maximum mortgage based on three and a half times the main applicant's gross annual income plus once the second applicants income or alternatively 3 times the joint applicants earnings but after deducting any existing financial debt. However, with property values booming and pay not keeping pace, providers had to react and many adapted to offering income multiple stretches of up to five x the main applicant's salary or to an affordability based lending model where some would assess maximum loan based on financial commitments (mortgage, loans and credit card payments) not exceeding 53% of net take home wage. (This was the equivalent of offering a seven x income multiple)
The poor credit market was also growing and many high street lenders were getting involved in the act and the interest rates offered between prime and near prime mortgages were getting closer and closer as competition raged in this profitable market. Bad credit lending criteria was enhanced and many lenders used a menu based process that put borrowers into categories such as near prime, light, medium, heavy or even unlimited adverse. It was possible to obtain a mortgage to stop repossession even if the borrower hadn't made a mortgage payment for the last 6 months and there was even a product to annul a bankruptcy by remortgaging available capital within a property to buy the mortgagor out of the bankruptcy or Individual Voluntary Arrangement (IVA).
The subprime crisis and credit crunch put a stop to all this as banks and building societies were not able to raise funding for specialist mortgages and the lending tap turned off overnight putting borrowers in the subprime arena with no chance of finding mortgage borrowing. Even though large numbers of the specialist lenders are no longer in existence, luckily as we start to recover and come out of recession there are some funders that are beginning to look at lending to those with a historic poor credit background.
Obviously the bad credit mortgage offering is nothing like it was in the past and if you are a first time buyer then the specialist bad credit lenders will not allow any County Court Judgments or defaults to be recorded within the previous 2 years but assuming you meet this poor credit criteria and the lender's income requirements, it's possible to obtain a loan with only a ten per cent deposit. If you are a homeowner then a small number of defaults and County Court Judgments are accepted during the last 2 years and even up to 3 missed mortgage payments within the last 12 months but watch for loan to value to be significantly restricted with this level of mortgage arrears.
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