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High street banks and building societies can afford to be choosy in the current finance environment and if you have an adverse credit background during the last 5 years then wait for the computer to say no and your application to be refused, particularly if you are a first time buyer with a low deposit.

It’s not totally the lenders fault for this harsh criteria as it’s more the case that they have now been forced to set the pass mark extremely high by the regulators even though it was the Financial Services Authority (the mortgage industry regulator) that were discovered sleeping on the job in the run up to the subprime crisis and credit crunch.

Within the late nineties until the beginning of the credit crunch, house prices had continuously boomed with double digit per cent growth rates year on year and funders had to react to this call for greater value borrowing by improving the income multiples that they were offering and relaxing lending criteria to allow 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 major financial centres in the world, the Chancellor of the Exchequer, Gordon Brown introduced ‘light touch’ regulation for Banks and for this reason the FSA paid little attention to the scant regard to prudent lending that mortgage providers were undertaking.

In the past, providers would evaluate the maximum mortgage based on 3.5 times the main applicant’s gross annual income plus once the second applicants salary or alternatively three x the joint applicants earnings but after deducting any existing financial debt. However, with property values booming and pay not keeping pace, funders had to respond and many changed to using income multiple stretches of up to five x the main applicant’s salary or to an affordability based lending model where some would evaluate maximum loan based on financial commitments (mortgage, loans and credit card payments) not exceeding 53% of net take home pay. (This was the equivalent of offering a 7 x income multiple)

The subprime market was also prospering and many high street lenders were getting in on the act and the interest rates offered between prime and near prime mortgages were getting closer and closer as competition prospered in this profitable market. Poor lending criteria was enhanced and many lenders used a menu based process that categorised borrowers into categories such as near prime, light, medium, heavy or even unlimited adverse. It was viable to obtain a mortgage to stop repossession even if the applicant hadn’t made a mortgage payment for the last 6 months and there was even a product to annul a bankruptcy by remortgaging available equity within a house to buy the mortgagor out of the bankruptcy or IVA.

The subprime crisis and credit crunch put a stop to all this as mortgage providers were unable to raise funding for specialist mortgages and the finance tap turned off overnight putting borrowers in the subprime arena with no chance of obtaining mortgage finance. Even if many of the specialist providers are no longer in existence, fortunately as we begin to recover and come out of recession there are some specialist funders that are beginning to provide for lending to those with a past poor credit background.

Obviously the bad credit mortgage provision is nothing like it was in the past and if you are a first time buyer then banks and building societies will not allow any CCJs or defaults to be recorded within the previous 2 years but assuming you meet this adverse credit criteria and the lender’s income requirements, it’s possible to obtain a borrowing with only a ten per cent deposit. If you are a homeowner then a small number of defaults and CCJs are accepted during the last 2 years and even up to three missed mortgage payments within the last twelve months but watch for loan to value to be significantly limited with this level of mortgage arrears.

Shaun Bielby is a mortgage and protection specialist with Mosaic Mortgages, a mortgage broker based in Harrogate, North Yorkshire providing independent mortgage advice throughout the UK. Mosaic Mortgages are specialists in arranging first time buyer mortgages and providing bad credit mortgages. Visit www.mosaicmortgages.co.uk to view our helpful first time buyer guides & bad credit mortgage guides.