In the context of UK mortgages, a credit-impaired customer (also known as an adverse credit customer) is an individual with a history of credit issues that may affect their ability to obtain a mortgage or result in them being offered less favorable mortgage terms. This status is typically defined by certain negative marks on their credit report. Here are the key factors that can define a credit-impaired customer:
Factors Defining a Credit-Impaired Customer:
1. Missed or Late Payments:
- Having a history of missed or late payments on credit accounts, such as credit cards, loans, or previous mortgages. This indicates to lenders that the borrower has struggled to meet financial obligations in the past.
2. Defaults:
- A default occurs when a borrower fails to make agreed payments on a debt for a significant period, typically resulting in the creditor closing the account and registering a default on the borrower’s credit report. This is a serious negative mark.
3. County Court Judgments (CCJs):
- A CCJ is a court order issued against someone who has failed to repay money they owe. CCJs remain on the credit report for six years and significantly impact creditworthiness.
4. Bankruptcy:
- Bankruptcy is a legal status for individuals unable to repay their outstanding debts. It remains on the credit report for six years and can severely affect the ability to obtain credit, including mortgages.
5. Individual Voluntary Arrangement (IVA):
- An IVA is a formal agreement with creditors to pay off debts over a period, usually five years. Like bankruptcy, it has a substantial impact on credit scores and remains on the credit report for six years.
6. Debt Management Plans (DMPs):
- A DMP is an informal agreement between a borrower and their creditors to pay off debts over a longer period, often with reduced payments. While not as severe as bankruptcy or an IVA, it still negatively affects credit ratings.
7. Mortgage Arrears:
- Falling behind on mortgage payments can lead to arrears, which are recorded on the credit report and indicate difficulties in managing previous mortgage commitments.
8. Repossession:
- Having had a property repossessed due to mortgage arrears is a significant adverse credit event, indicating serious financial difficulty and a high risk to potential lenders.
Impact on Mortgage Applications:
1. Higher Interest Rates:
- Lenders typically charge higher interest rates to credit-impaired customers to offset the increased risk of lending to them.
2. Larger Deposits:
- Borrowers with adverse credit may be required to provide larger deposits, sometimes as much as 20-30% of the property value, compared to the standard 5-10%.
3. Limited Mortgage Options:
- Credit-impaired customers may have fewer mortgage products available to them, often having to choose from specialist lenders rather than mainstream ones.
4. Stricter Lending Criteria:
- Lenders may impose stricter lending criteria, such as lower loan-to-value (LTV) ratios and more rigorous affordability assessments.
Improving Chances of Approval:
Credit-impaired customers can take steps to improve their chances of mortgage approval:
- Credit Repair: Working to improve credit scores by addressing any outstanding debts, making timely payments, and correcting any inaccuracies on credit reports.
- Saving for a Larger Deposit: Accumulating a larger deposit can help mitigate the risk to lenders.
- Seeking Specialist Advice: Consulting with mortgage brokers who specialize in adverse credit mortgages can help find suitable products and lenders.
- Demonstrating Financial Stability: Providing evidence of stable income and employment history can reassure lenders about the borrower’s ability to meet mortgage repayments.
Conclusion:
A credit-impaired customer is defined by a history of adverse credit events such as missed payments, defaults, CCJs, bankruptcy, IVAs, mortgage arrears, and repossession. These factors make it more challenging to obtain a mortgage, often resulting in higher costs and stricter terms. However, by understanding the criteria and taking proactive steps to improve their financial situation, credit-impaired customers can still secure a mortgage and work towards homeownership.