Can I get an HMO mortgage with bad credit?

Securing a House in Multiple Occupation (HMO) mortgage when you have a history of adverse credit is complex but certainly achievable. Standard high-street lenders may decline your application, requiring you to approach specialist mortgage providers or brokers who are accustomed to assessing higher-risk applications based on the severity and age of the credit issues. Expect higher interest rates and larger deposit requirements than standard Buy-to-Let (BTL) products.

Can I get an HMO mortgage with bad credit? Understanding Adverse Credit and Specialist Lending

Yes, it is possible to get an HMO mortgage even if you have bad credit, but the process requires careful navigation and typically involves specialist financial products. HMOs (properties rented to three or more unrelated tenants forming more than one household) are already considered more complex than standard Buy-to-Let (BTL) properties due to the increased regulatory and management requirements, including obtaining the necessary licences from your local authority. Adding adverse credit history to this complexity narrows your lending options significantly.

Mainstream banks and building societies often rely on strict credit scoring models. If you have CCJs (County Court Judgments), defaults, or arrears, their automated systems are likely to reject your application outright. This is where specialist mortgage providers and intermediaries, like Promise Money, become essential. These lenders often use manual underwriting, allowing them to assess the full context of your financial situation rather than just your credit score.

How Does Adverse Credit Affect an HMO Application?

When assessing any mortgage application, lenders primarily look at two factors: the risk associated with the applicant (you) and the risk associated with the asset (the HMO property).

Lender’s Assessment of Risk

Adverse credit directly increases the perceived risk that you might default on the repayments. Specialist lenders categorise adverse credit based on its severity and recency:

• Severity: A low-value default from five years ago is treated much less seriously than a recent bankruptcy or large CCJ. Lenders will want to know the circumstances surrounding the credit issue.
• Recency: The older the issue, the less impact it generally has. Issues satisfied or settled over three years ago are viewed more favourably than those registered within the last 12 months.
• HMO Income Stability: Lenders scrutinise the projected rental income (the rental yield). Because HMOs often generate a higher yield than single-let properties, this increased income can sometimes help mitigate the risk posed by poor credit, provided the rental coverage meets strict requirements.

The Importance of Speaking to a Broker

A specialist broker understands which lenders are most lenient regarding specific types of credit issues (e.g., one lender might overlook secured loan arrears but be strict on missed utility payments, while another takes the opposite view). They can significantly save you time and protect your credit file by avoiding applications with unsuitable lenders.

Navigating Specialist HMO Mortgage Criteria

If you have bad credit, securing an HMO mortgage will require you to meet stricter criteria than a prime borrower. You need to demonstrate strong financial stability moving forward.

1. Deposit Size Requirements

Lenders mitigate risk by requiring a higher Loan-to-Value (LTV) ratio. While a borrower with perfect credit might secure an HMO mortgage with a 20% deposit (80% LTV), a borrower with adverse credit should typically expect to put down a minimum of 25% to 30%. In severe cases, an LTV might be capped even lower, requiring a 40% deposit.

2. Rental Stress Testing

Lenders must be satisfied that the property’s rental income can comfortably cover the mortgage payments, even if interest rates rise. This is known as “stress testing.”

The standard calculation usually involves proving that the projected monthly rent covers 125% to 145% of the mortgage interest (calculated at a hypothetical, higher rate). For adverse credit applicants, this stress test rate is often higher still, ensuring a greater buffer.

3. Demonstrating Affordability and Income

Although HMO mortgages are primarily assessed on the rental income potential, lenders will also want to see proof of your personal income (e.g., salary or business profits). This is crucial, as they want assurance that you could sustain payments from your own funds if the property was temporarily vacant or the licence was revoked.

Practical Steps to Improve Your HMO Mortgage Application

Before applying, taking proactive steps to clean up your finances and prepare your application can drastically improve your chances of approval and help secure a better rate.

• Review Your Credit File: Understand exactly what blemishes exist, how recent they are, and their value. Ensure all information is accurate and dispute any errors immediately. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)
• Settle Existing Debts: If you have minor CCJs or defaults, settling these before application, even if they are old, shows the lender that you are managing your financial obligations responsibly.
• Save a Larger Deposit: Maximising your deposit reduces the risk for the lender and could open up more competitive products, even in the specialist market.
• Gather HMO Documentation: Ensure all property documentation is in order, including proof of planning permission (if required), confirmation that the property meets regulatory standards, and evidence of your landlord experience. You must also confirm you comply with local authority rules. You can check the rules on HMO licensing via the government website.

Considerations for Interest Rates and Fees

It is important to manage your expectations regarding the costs involved. Bad credit HMO mortgages are inherently more expensive due to the higher risk profile.

• Higher Interest Rates: Expect the interest rate to be significantly higher than prime BTL rates, often 1% to 3% higher depending on the severity of the adverse credit.
• Increased Arrangement Fees: Specialist lenders typically charge higher arrangement fees (also known as product fees) for complex or adverse credit cases. These can often be 1.5% to 3% of the loan amount, and sometimes higher.
• Broker Fees: Given the complexity, many specialist brokers charge a fee for their expertise in placing high-risk cases.

People also asked

What is the minimum deposit required for an HMO mortgage with poor credit?

While the minimum deposit for a standard HMO mortgage might be 20%, applicants with poor credit should realistically expect to need a minimum of 25% to 30%. For those with very recent or severe adverse credit history, deposits exceeding 35% may be required, depending on the individual lender’s risk appetite.

Can I apply for an HMO mortgage if I have a recent CCJ?

Yes, but recent CCJs (County Court Judgments registered within the last 12-24 months) pose a greater challenge. You will almost certainly need a specialist lender who focuses on the context—such as whether the CCJ was satisfied (paid off) prior to application—and you should be prepared for the highest interest rates available in the adverse credit market.

Do I need prior landlord experience to get an HMO mortgage with bad credit?

While some specialist lenders may consider first-time landlords, having prior experience managing single-let BTL properties is a significant advantage when applying for a complex HMO product with adverse credit. Landlord experience demonstrates competence in tenancy and property management, mitigating some of the risk associated with your credit history.

Is using a bridging loan an option for my HMO purchase?

Bridging finance is often used by investors to purchase a property quickly or fund refurbishment before refinancing onto a standard HMO mortgage. However, bridging loans are short-term, high-interest products. If you use bridging finance, be aware that your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, increased interest rates, and additional charges.

How long do I need to wait after bankruptcy to apply for an HMO mortgage?

Lenders generally require applicants to be discharged from bankruptcy for a minimum period, typically 12 months, but often three to six years is preferred before they will consider offering an HMO mortgage. The longer the period since discharge, the greater the likelihood of finding a competitive rate with a specialist provider.

Conclusion: Finding the Right Path to HMO Investment

The journey to securing an HMO mortgage with bad credit is rarely straightforward, but the specialised nature of the UK lending market means solutions are available. The crucial element is preparation and securing expert guidance.

By using a broker experienced in adverse credit and HMO products, you can access lenders who are willing to overlook past financial difficulties, provided the investment property is sound, the rental income is robust, and you can offer a substantial deposit. While the cost may be higher initially, refinancing onto a more competitive rate may become an option once your credit history improves and you have a track record of successful property management.

Focus on presenting a strong business case and demonstrating clear steps toward financial recovery to maximise your chances of securing the necessary finance.