Shared Ownership and First Time Buyers with bad credit history

Shared Ownership and First Time Buyers with bad credit history

what are your options?

Bad credit and affordable housing options

We often get calls from first-time homebuyers who situation is complicated by a bad credit history, and income which makes overall affordability problem in the area which they wish to purchase.

In this kind of scenario, the shared equity affordable housing options such as First Buy and Help to Buy can be of limited use.

This is because lenders that can handle bad credit histories will not do shared equity lending. Fortunately, the situation is more favourable with shared ownership purchases where there are some specialist lending avenues.

Bad credit history and shared ownership mortgages

Unless you have very mild issues on your credit file, the only options currently available for mortgage lending on a shared ownership property are priced aggressively in terms of rate.

If a borrower were to focus on the rate charged on the mortgage it would most likely put them off of the purchase. The advantage with shared ownership however, is that you can limit the size of your mortgage by purchasing a smaller share and therefore reduce the effect of your bad credit history on your monthly costs.

For example a borrower purchasing a property price to £200,000 with a 20% deposit still has to borrow £160,000.

If that £160,000 is borrowed on an aggressive pay rate it can make the whole purchase unaffordable.

A shared ownership purchaser who is buying a 25% share of a similar property will only be taking a mortgage with a maximum size of £50,000. Therefore for the shared ownership purchaser the effect of a high mortgage rate is greatly reduced and the rent that has to be paid on the remainder of the property is not affected by the bad credit history.

As the credit file clears out and access to more mainstream mortgage lenders becomes a possibility, the borrower can swap their mortgage to a more favourable rate and possibly at the same time buy a larger share of the property.

Shared ownership mortgages and affordability

Those with incomes around the national average who are living in expensive areas to purchase such as the south-east can find it difficult to afford the mortgage and property they need.

By using a shared ownership arrangement, buying a small percentage of the property and paying a competitive rental on the remainder this problem can often be resolved.

Is shared ownership for you?

To take advantage of shared ownership offers you will need:

  • to be able to prove your income
  • to be ready to compromise on the area in which you live
  • to be patient as you purchase your property in stages
  • to understand that a bad credit history will mean a higher mortgage rate

First steps?

Shared ownership properties are handled and marketed by your local housing association.

The first step will be to approach them to see what properties are available in your area which may be suitable for you. In the majority of cases there is plenty of information online on available properties, their prices and associated costs. A good start point is to Google ‘housing options’.

Your local housing association will recommend you to a mortgage broker or IFA to check your financial situation and assist with a mortgage.

In many cases these companies do not handle bad credit mortgages and if this is the case you can then come back to a specialist such as ourselves here at A Mortgage Now.

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