Following on from the previous articles, (parts 1,2 & 3) which explained what a bad credit mortgage is, how bad credit may come about and how lenders may view your bad credit and the impact bad credit can have on a mortgage application, we are now going to look at how the ‘credit crunch’ has effected bad credit mortgage products. Whilst this is very complicated (I promise to keep it as jargon free and none technical as possible) we are going to look at an overview of how the credit crunch has effected the actual criteria of mortgage products in the sub prime market, what do we mean?
Well to start with the lending criteria for mortgage products has become more stringent
Lets say a mortgage product 12 months ago would allow you to borrow 90% of the purchase price and allow 1 missed mortgage payment, a total of £5,000 CCJ’s and would not take defaults into account, a comparable mortgage product today which would allow the same adverse credit would probably restrict you to 85% of the property value, which means you need extra deposit, this also means less risk for the lender.
This has primarily come about due he difficulties lenders face raising capital for mortgage funds (a direct result of the global ‘credit crunch’), the majority of lenders raise mortgage funds from the wholesale money markets at the LIBOR rate (London Inter Bank Offered Rate), LIBOR is the rate of interest banks lend money to each other, LIBOR is effected by global markets and obviously, the more it costs a lending institution to raise funds, the more it will cost you to purchase which can effectively price the product out of the market, the lenders need to protect themselves and not open themselves up for mortgage products to fail is a pretty good way of doing just that, so they have tended to steer clear of high risk products (such as 100% or 95% mortgages) another way lenders protect themselves is to tighten up the lending criteria so they get, for want of a better word, a better class of bad credit clients or clients who are less of a risk, they also reduce the loan to value available, decrease their equity stake in a property (85% loan opposed to a 90% loan) there are other factors but we are not going to get technical remember.
Lenders which have not been hit quite so hard tend be ones that do not rely on funds from the wholesale money markets, this is typically called ‘balance sheet lending’ which means they use their own funds and lend their own money, they work of their own ‘balance sheet’ to determine what funds they have for mortgage purposes, speaking in very general terms, the more funds they have available on their books, the better and more diverse the mortgage products will be as they have more to speculate (that’s it for money markets and balance sheets, we are trying to keep this jargon free).
To sum up, the UK mortgage market has seen a lot of changes recently and the sub prime or bad credit market has been hit hard – but the question is – do you think you should bother applying for a mortgage with bad credit? If you ask me I would have to say yes, there are still some good products out there and interest rates should be a little more stable in 2008 which is good news for everyone, and in many respects the tightening criteria just means mortgages that are approved are a more “solid” investment for both the lender and the borrower so everyone benefits.
I hope these articles have helped you understand a little more about the processes of apply for a mortgage with bad credit and the effects bad credit has on the mortgage products available and how that might effect what is available to you. The bottom line is no two circumstances are different and there are literally thousands of products available and as the old saying goes, if you don’t ask you don’t get so if you seriously want to know if you can get a mortgage or remortgage for that matter just make sure you speak to someone who knows the market, what’s the worst they can say?