When any lender is reviewing a mortgage application, they’re going to refer to the applicant’s credit score to help them decide whether they’re likely to get their money back.
Let’s look at how credit scores work, and how big a part they play in the mortgage application process.
A credit score is compiled by credit reference agencies. The three main ones in the UK are Equifax, TransUnion and Experian. They are building a picture of your ability to pay off your debts, how much credit history you’ve got and how stable your lifestyle is.
To compile your credit score, they use sources of information like:
Credit reference agencies use your history of repaying debts to rate the potential for you to pay back a loan – like a mortgage – in the future. The higher your credit score, the more favourably a lender will look on your application.
Your credit score is an effective way of informing a lender how financially responsible you are – how reliable you have been previously in paying back debts. This could be a mortgage, car finance agreement, credit card and/or personal loan. They will use this information to help them to predict how likely you are to consistently make your mortgage repayments going forwards.
Whether you have a good or bad credit rating could impact the interest rate you are offered; if you have a good credit rating you are more likely to be eligible for a special introductory rate or other attractive conditions.
There are several ways that you can improve your credit score, including the following:
Pay your household bills, credit cards and any loans on time, every month. If you haven’t already, setting up direct debits is a good way to do that, saving you this manual task and making sure your payments are made like clockwork.
It’s important to make sure you’re on the electoral register, so that lenders can verify your address and see how easy you are to contact.
Every time you apply for a loan, it comes up on your credit report as a ‘credit search’. Try to minimise the loan applications you make in the few months before you apply for a mortgage, as it can look like you’re too reliant on credit.
Another useful tip is to make sure you’re not ‘maxed out’ on your credit limits as this can give the impression that you’re under too much financial pressure to be able to afford a mortgage as well. Try to stay at under 30% of your total available spending, and only have one or two active credit cards to make paying off your debts more manageable.
You could have old mobile phone and credit card accounts registered at previous addresses which could affect any ID checks, so make sure that any dormant accounts are shut down.
Regularly check your credit report – it will flag any issues or any inaccuracies you need to rectify, by raising your concerns with the credit agency.
Some people think that your mortgage application will be automatically declined if you don’t have a good credit rating. This is not the case, however a lower than ‘Very Good’ credit rating could mean that only a more restricted range of products is available to you, with higher interest rates and lower borrowing limits.
Another common misconception is that you are more likely to get a mortgage approved if you have never had any other debts – i.e. never taken out a credit card or a loan. Actually, the opposite is true. If you have never managed any other debt, your lender has nothing to assess your creditworthiness on. A good, solid credit history is better than no credit history.
Each lender will have their own rules and benchmarks when they’re reviewing credit scores, but they will all be looking at several key factors when they are deciding whether to approve your mortgage application or not. These include:
Lenders will also look at your financial status before they approve your mortgage application, carrying out affordability checks to make sure you should be able to keep up with your monthly repayments as well as all your other financial commitments and costs of your lifestyle.
The higher your credit score the better. As a general rule of thumb, the higher your credit score, the more options you will have and the more mortgages you will be accepted for, including those with the most competitive terms.
If your credit rating is ‘low’, you could find it difficult to get a mortgage application approved and any offers available to you are likely to carry highest interest rates.
Lenders don’t have a particular credit score threshold that they use to approve or decline a mortgage application. You want your credit score to be as high possible, though, as you’re then seen as lower risk and more likely to keep up with your mortgage repayments.
Conversely, having a history of defaulting on previous loans will label you as higher risk of not repaying your mortgage each month, which could lead to your mortgage application being declined.
Credit reference agencies rate an individual’s credit score by categories that can range from ‘Very poor’ to ‘Excellent’. A mid-range rating like ‘Fair’ probably won’t automatically mean that your mortgage application is declined, however, the lender will probably limit the options available to you and the interest rate could be higher due to you being deemed as potentially higher risk.
When you apply for a mortgage, the credit reference agency is likely to carry out a ‘hard’ search on your file. This shouldn’t significantly impact your credit rating in itself, though it’s worth remembering that multiple hard searches in a short period of time could lower your credit rating.
Having a mortgage can improve your credit score, as long as you keep up to date with your payments.
Our expert team of independent mortgage advisers is helping customers with mortgage applications every day. They will get to know you and your personal circumstances and offer helpful advice to make sure your credit score is as good as it can be.
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.