This week&#39s problem case

John and his girlfriend recently split up and sold their property, clearing the mortgage arrears. John has run into difficulties with payments on two CCJs totalling £1,500. After various short contracts, he now has a permanent job with a salary of £23,000. Having rented at several addresses for two years, he wants to buy a flat for £71,000. He has an £11,000 deposit, but is unclear whether he needs a non-conforming loan or if he can go to the high street.

Intermediary response

Ray Boulger, senior mortgage technical manager at Charcol, says John should pay off his CCJs, wait for six to 12 months and then apply for a mainstream mortgage

As John has been renting for two years and redeemed his mortgage two years ago his arrears are historic enough to mean that plenty of mainstream lenders (but not all) would ignore them if they were his only problem, though some would want evidence that he has paid his rent promptly.

The implication is that John&#39s CCJs were incurred some time ago and the court has ordered him to pay them off monthly. As the CCJs total only £1,500, whereas he has had savings of £11,000 since the sale of the house two years ago, his decision not to make the required payments on the CCJs is clearly a question of choosing not to pay them rather than not being able to afford to pay. This is short-sighted and will count against him with most mainstream lenders.

To mitigate this, he should pay off the outstanding amounts straight away. He must then make sure he gets certificates of satisfaction for both CCJs and ask both creditors to confirm that they have informed all relevant credit reference agencies.

Although using some of his savings to pay off the balance of the CCJs will reduce his deposit he will still have well over 10%. The longer the gap between paying off the CCJs and applying for a mortgage the more chance he will have in the mainstream market. Abbey National is one mainstream lender who will consider applicants with CCJs of up to £3,000, providing none have been incurred in the last year, and especially if they have a deposit of least 10%. However, they credit score and John&#39s history over the last three years could well mean a low score. Apart from the CCJs he has had several addresses and in my experience people in this situation often don&#39t bother to register on the electoral roll, which will aggravate his low score. In addition he has had several jobs over the period, further reducing his credit score.

On the plus side he now has a permanent job, a reasonable deposit and only needs to borrow a multiple of less than 2.75 times his income. My advice, in addition to paying off his CCJs and making sure he is on the electoral roll, would be that if John waits six to 12 months, particularly if during this time he doesn&#39t change his job or his rented home, he should be able to get a mainstream mortgage on normal rates. However, if he decides to buy now it will be more difficult in the mainstream market and his options will be limited to lenders who don&#39t credit score.

If a mainstream mortgage can&#39t be secured I would strongly recommend John limits his consideration of subprime deals to those with no MIG and only short term early repayment charges, say a maximum of two years as, providing he keeps his nose clean, he should be able to obtain a mortgage at mainstream rates within two years. Some of the cheaper sub-prime deals will ignore CCJs and arrears incurred more than a year ago and/or small amounts of CCJs and in this case one suitable deal would be a two-year fix well below 6% with a two-year ERC period from BM Solutions.

Lender response

Julian Wells, head of marketing at Mortgages PLC, says John should look to a specialist lender who will assess his current situation and offer him a competitive rate

Separations and divorces are increasingly common and many more people are having trouble getting back onto the property ladder with a new mortgage. This can be even more difficult when CCJs are involved.

John is better off speaking directly to a broker for advice on a mortgage and the various lenders out there. It is likely that a high street lender would turn down his application based on his CCJs and the fact that he cannot give a permanent address for the last couple of years. With his credit history, John needs a lender who would be willing to look at his current and future circumstances, rather than using credit scoring methods.

John needs a specialist lender. He may not consider himself to be a prime candidate for a non-conforming lender but a non-conforming lender will assess his situation and his ability to pay in the long-term as well as the short-term. They will look at how the CCJs occurred and how well he is managing his finances now. The non-conforming sector is a competitive marketplace and John should not find himself restricted in terms of lender or product – he is not at the higher end of problem cases and should be able to find a competitive rate for his new mortgage.

Outstanding CCJs of £1,500 are permitted across the board by many non-conforming lenders, and John&#39s mortgage arrears have already been cleared so he is in a better position than some. In terms of affordability, John just has enough deposit for 15% of the purchase price and the amount he would have to borrow is less than the maximum amount most lenders will allow of 3 x his income.

The multiple addresses over the past year or two could be a problem with many lenders as they will require a full address history and proof of residency at each address. Mortgages PLC would only ask for one proof of residency in the last three months. As none of the arrears on the joint mortgage were in the last 12 months he could apply for the Mortgages PLC Light Adverse 85% product, which offers a 1.5% discount until March 31 2004. This mortgage has an initial rate of 5.25%. The rate reverts to 7.00% after March 31 2004, but if John maintained mortgage payments and gathered no further credit problems in the next two to three years he would be eligible for a prime mortgage after that time with a high street lender if he prefers.

John is a classic example of a borrower dipping their toe into the non-conforming market. He does not have a huge problem, but he is not your average high street borrower. Mortgages PLC regularly caters for this type of borrower and he should have no problem satisfying the criteria for one of our mortgage products.