Finance for building with bad credit

Understanding Finance for Building with Bad Credit

Building a home is a dream for many, but for individuals with bad credit, this goal may seem out of reach. The good news is that while having poor credit can present challenges, it doesn’t necessarily disqualify you from obtaining finance to build your dream home. This article will explore the ins and outs of securing finance for building with bad credit, the options available to you, and how to improve your chances of success. We’ll also touch on how Kandoo, a UK-based retail finance broker, can assist you in navigating this process.

What is Bad Credit?

Before diving into the specifics of financing with bad credit, it's essential to understand what bad credit means. In the UK, your credit score is a numerical representation of your creditworthiness, based on your financial history. Credit reference agencies such as Experian, Equifax, and TransUnion compile credit reports that lenders use to assess your ability to repay loans.

A "bad credit" score typically results from missed payments, defaults, bankruptcy, or having too much debt. It signals to lenders that you are a higher risk, which can make obtaining finance more difficult. However, it’s important to note that bad credit is not a permanent situation. With time, effort, and responsible financial management, you can improve your credit score.

Can You Get Finance for Building with Bad Credit?

Yes, it is possible to secure finance for building with bad credit, but the process is more complex, and you may face higher interest rates or stricter terms. Lenders are generally more cautious when dealing with individuals with poor credit histories, but this doesn’t mean that all doors are closed.

Several financial products are designed specifically for people with bad credit, and alternative financing options may also be available. However, it’s essential to be realistic about what you can afford and be prepared for potential setbacks along the way.

Types of Finance Available for Building with Bad Credit

There are a few different financing options available if you have bad credit. Some are more accessible than others, but it’s important to explore all possibilities to find the one that works best for your situation.

1. Bad Credit Mortgages

Also known as subprime or adverse credit mortgages, bad credit mortgages are designed for people with poor credit scores. These mortgages typically come with higher interest rates and require larger deposits to offset the lender’s risk. The good news is that if you can maintain regular payments, you may be able to remortgage to a better deal after a few years, once your credit score has improved.

Key Features:

• Higher interest rates compared to standard mortgages.
• Larger deposits (often around 15-30%).
• Stricter lending criteria.
• Potential to remortgage at better terms in the future.

2. Self-Build Mortgages

If you're planning to build your home from the ground up, a self-build mortgage could be an option. Unlike standard mortgages, self-build mortgages release funds in stages, aligned with the progress of the build. While it may be more challenging to secure a self-build mortgage with bad credit, it’s not impossible. You will likely need to provide a detailed plan, including cost estimates and timelines, to reassure lenders of the project's viability.

Key Features:

• Funds are released in stages as the build progresses.
• Higher deposits (often 25-30%) may be required.
• Lenders will closely scrutinise your building plans and budget.

3. Guarantor Loans

If your credit score is preventing you from securing a loan, a guarantor loan could be a viable alternative. With a guarantor loan, a friend or family member with a good credit history agrees to "guarantee" your loan by promising to cover repayments if you default. This reduces the risk for lenders and can make it easier for you to secure finance, even with bad credit.

Key Features:

• Requires a guarantor with good credit.
• You may be able to borrow more than you would with a standard bad credit loan.
• Higher interest rates than standard loans but lower than payday loans.

4. Specialist Lenders

In addition to traditional high street banks, there are specialist lenders who cater specifically to individuals with bad credit. These lenders may offer more flexible terms and be more understanding of your credit history. However, their products may come with higher interest rates and fees, so it's crucial to carefully assess the total cost of borrowing.

Key Features:

• Lenders that specialise in bad credit may offer more tailored products.
• Higher interest rates and fees.
• More flexible eligibility criteria.

Improving Your Chances of Securing Finance

While bad credit may limit your options, there are several steps you can take to improve your chances of securing finance for your building project.

1. Check and Improve Your Credit Score

Before applying for finance, check your credit report to ensure there are no errors or inaccuracies. If you spot any mistakes, contact the credit reference agency to have them corrected. You can also take steps to improve your credit score over time, such as:

• Paying bills on time.
• Reducing your overall debt.
• Keeping your credit utilisation low (using less than 30% of your available credit).
• Avoiding multiple credit applications in a short period.

2. Save for a Larger Deposit

A larger deposit reduces the amount you need to borrow, which can make you a more attractive candidate to lenders. If you can save up a substantial deposit (e.g., 20-30%), it may offset the risk posed by your bad credit, making it easier to secure finance.

3. Prepare a Detailed Plan

If you’re applying for a self-build mortgage, having a detailed plan is essential. This should include:

• Accurate cost estimates for materials and labour.
• A clear timeline for the build.
• Evidence of planning permission and building regulations approval.
• A contingency budget for unexpected costs.

A well-thought-out plan can reassure lenders that your project is viable and that you have considered all potential risks.

4. Work with a Broker

Navigating the world of finance can be overwhelming, especially if you have bad credit. This is where a finance broker, such as Kandoo, can be invaluable. Brokers have access to a wide range of lenders and can help match you with the right product based on your financial circumstances.

How Kandoo Can Help

Kandoo is a UK-based retail finance broker that works with a wide network of lenders, offering a range of financial products tailored to individual needs. Whether you're looking for a bad credit mortgage, a self-build mortgage, or another type of loan, Kandoo can help you explore your options and find the best deal.

Benefits of Using Kandoo:

• Access to Multiple Lenders: Kandoo works with a panel of lenders, increasing your chances of finding a product that suits your needs, even if you have bad credit.
• Expert Advice: Kandoo’s team of finance experts can provide personalised advice and guide you through the application process, helping you understand the terms and conditions of different loans.
• Time-Saving: Instead of applying to multiple lenders individually, Kandoo does the legwork for you, presenting you with the best options in one place.
• Tailored Solutions: Kandoo understands that everyone’s financial situation is unique. They will work with you to find a solution that fits your specific circumstances.

The Risks of Building with Bad Credit

While securing finance with bad credit is possible, it's important to be aware of the risks involved. Higher interest rates mean that you’ll end up paying more over the life of the loan, and if your financial situation worsens, you may struggle to keep up with repayments. Additionally, if your building project goes over budget or takes longer than expected, you could face financial strain.

How to Mitigate Risks:

• Create a detailed and realistic budget with a contingency plan.
• Only borrow what you can comfortably afford to repay.
• Work with reputable builders and contractors to avoid delays or unexpected costs.
• Regularly review your financial situation and adjust your plans as needed.

Conclusion

Building your dream home with bad credit is challenging, but not impossible. By exploring different financing options, improving your credit score, and working with a finance broker like Kandoo, you can increase your chances of securing the funds you need. It’s important to approach the process with caution, ensuring that you understand the terms of any loan and have a solid plan in place for your building project.

Kandoo can help you navigate this complex process, offering expert advice and access to a range of lenders. With careful planning and the right support, building your dream home can become a reality, even with bad credit.