Bad Credit Mortgage - can you afford it?
If you are applying for a bad credit mortgage, a poor or adverse credit mortgage or remortgage and have never gone through the process before then this information should prove useful - it is intended to help you understand and evaluate whether you can afford a mortgage with bad credit.
What do I need to know when applying for an adverse credit mortgage?
There are a large number of things to consider when applying for a mortgage with adverse credit and we will cover the majority of them here - the main things to consider are affordability and repairing future credit so as not to keep incurring the increased higher rates of interest and fees which are typically associated with mortgages for the credit impaired.
How do I know if a bad credit mortgage is affordable?
If you want to find out how a lender works out affordability, we have a page dedicated just to that which should help you understand how they will view things to view that page, click here. however we have found that regardless of whether a lender feels a mortgage is affordable its a good idea to go through the process yourself so you can realistically determine if you can afford a new mortgage - simply agreeing with a lender on affordability may not be right for you, considerations should also be given into repairing any bad credit or adverse credit which will mean any future mortgages are even more affordable to you.
We will be working with monthly figures only as that's when most mortgage payments are made, if you get paid weekly, fortnightly or four weekly then you should adjust these to a typical monthly figure.
For the purpose of the exercises below we will be working on the assumption that you know what any new mortgage costs would be - if using a broker they will typically offer you the best deal available which will usually mean the lowest monthly payments available(this may not always be the case - bearing in mind there are other costs to be considered), a broker does not dictate what you pay, a mortgage broker will simply offer the very best deal available based on your needs, preferences and budget - if you follow the steps below it should provide a little peace of mind when agreeing to any mortgage payments, or allow you to question whether its truly affordable.
Work out your expenditure for a bad credit mortgage
The first thing to do is to list down your essential spending (such as food costs, gas, electric, TV licence, Council Tax, work travel etc) - the things you can not go without, guessing at them will more than likely mean something gets missed, you should also include any priority debts in with this list as priority debts must be paid - at this stage its a good idea not to include your existing rent or mortgage payments as these will be replaced by a new mortgage if an adverse credit mortgage application is approved and completed.
Then list down any monies you owe, your contractual agreements (such as credit cards, loans, hire purchase agreements etc) if they are being managed by a debt management company you can use their debt management statement for this (as long as this includes everything you owe), you should list the amounts owed and the monthly payments being made.
If you plan on repaying your existing debts or some of your existing debts with your mortgage (for example; with a bad credit remortgage, you may be able to repay some of the bad debt) - this will mean the monthly payments for the debts you want to repay will no longer apply if the mortgage goes through so you should not include any debts you plan to repay with your new mortgage.
Next you should list lifestyle costs, lifestyle costs, whilst not essential are those regular costs which would change the way you life if you didn't incur them (such as going to the pub or going out for meals), you should list these in order of importance to you, whilst this list may include a number of things common to all people this list will be very specific to you and what you view as important to your standard of living.
Work out your income for a mortgage with bad credit
Again this should be listed down, simply saying its about this or that per month isn't really accurate enough to be certain a mortgage will be affordable. If your income alters slightly from month to month you can go through your wage slips for the past few months, ass the totals and then divide the total amount by the number of months you used which will give a monthly average. If you need to work out a monthly average, you should not really include the odd month where you earned an unusually high amount (for instance if you worked double shifts over the weekend which is out of the norm). Be careful not to work of your gross salary, you wont be able to spend the gross amount as tax etc is deducted - so you should be working of your net or take home pay.
Work out your disposable income for a mortgage with bad credit
To work out your disposable income for mortgage purposes you simply take the payments from the first two lists (your essential monthly payments along with any contractual agreements payments) and minus both of these from your average monthly income and this is what - without any mortgage payments you need to life on (bearing in mind we have not yet deducted any lifestyle costs).
please note:
when working out your disposable income for any other purpose you should always include monthly rent or mortgage payments, for what we are trying to do, we want to be adding these later as a reminder of the new mortgage payments - so they don't get lost with all the other figures.
Next you need to minus your lifestyle costs. What you are left with is your total monthly disposable income without any mortgage costs.
So, can I afford my new mortgage, even with bad credit?
If the disposable income figure is greater than the monthly payments for a bad credit mortgage then you should be able to afford the mortgage without effecting your lifestyle.
If it is very close or the same then you may need to consider the possibility that, in order to realistically afford the new monthly bad credit mortgage payment you may need to change your lifestyle, as each persons lifestyle varies greatly its very much a personal thing (for example: if you go to the pub 4 times a week, it may do you some good to cut this down to twice a week)
Other things to think about when applying for a mortgage
Some thought also needs to be given about the adverse credit you have listed on your credit file, it may be that your are in the fortunate position of having repaid the bad debt and after a couple of years they should have little or no impact on any mortgage applications. If however you are still repaying your bad debt, and you have yet to arrange sustainable payments to your creditors or entered into a professional payment plan through a third party it may be worth taking into account the possibility you may be better clearing adverse credit issues prior to entering into a new mortgage. Obviously if you are requiring a remortgage then you will normally need advice on the best deal available and will usually have repayment plans in place.
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