Credit Scores and Mortgages

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What kind of credit score do you need to have to get approved for a mortgage?

There are no set minimum credit scores for people looking for a mortgage, however, the UK government made changes to the mortgage application process in March 2016 meaning stringent affordability rules must be applied to all applicants.

The new rules came in response to the failings in the past when lenders awarded mortgages freely to sub-prime borrowers. Many people believe that this kind of lending led to massive defaults in the 2006 recession and was a major reason for the subsequent global financial crises.

Particularly in the US, many banks lent too much money to sub-prime borrowers, who in turn defaulted very quickly when the economy turned bad, sub-prime borrowers are those that cannot easily afford to repay higher amounts if interest rates suddenly increase. In order to address this problem and prevent the same mistakes, lenders now have to apply very tight affordability tests for all borrowers.

What do mortgage lenders need to know?

Lenders will need to know your total income, including your basic salary and any additional income you receive from a second job, bonuses, commissions, benefits and any other income.

Checking affordability is a much more detailed process. Lenders take all your regular household bills and expenses into account, along with any current debts such as loans, credit cards, and overdrafts to make sure you have enough surplus to pay your monthly mortgage.

They will also ‘stress test’ your financial circumstances. This means that should there be a change in circumstances outside of your control, such as an interest rate rise, or if you were to retire, go on maternity leave, you can still afford to make your mortgage repayments easily.

In addition to the affordability and stress tests, they will credit check all parties on the application with a credit reference agency. This will give them an insight into how you have managed your other credit products and if you are a responsible borrower.

Can you still get a mortgage with a less than healthy credit profile?

Getting a mortgage with bad credit is tricky, but not impossible. In the past, there were a number of lenders who used to specialise in offering adverse credit or sub-prime mortgages to borrowers but the new rules mean that these lenders have now largely disappeared. It does not mean that there are no options at all for those with bad credit as long as the affordability rules are still met.

The exact credit profile you need to apply for a mortgage varies from lender to lender. The concept of bad credit is subjective and this is because expectations vary between lenders, while one might approve you, another might reject you regardless of any credit issues. This is because the lenders have different business models and target different risk demographics of the lending market. For all mortgage applications, you will still need to show sufficient income levels for the required borrowing before a lender will offer you a mortgage.

What should you do if you have bad or no credit?

A poor credit score can happen to anyone at any time of life and major reasons for a low score are those individuals with a performing debt management plan, those who may be going through a changing life event, such as a divorce, illness or redundancy, people who may have disputed a bill with a supplier and as a result have incurred a blip on their credit file, or new borrowers or those with a thin credit file.

A less-than-perfect financial past means for a lender to approve an application they will need to assess an application on its own merit and investigate the reasons an applicant might have suffered a poor credit score.

What should you do if your mortgage application is rejected?

There are many reasons why a mortgage application could be declined. Mortgage lenders may reject your application if:

You have lived in the UK for less than three years

Most lenders are unwilling to lend to new arrivals. If you have recently arrived in the UK and want to apply for a mortgage you will need to evidence your employment contract and proof that you have permission to live and work in the county.

You are not registered to vote

If you are not on the electoral register at your current address lenders may not be able to ascertain where you live.

You have too many credit applications

When you apply for credit, searches are made to see if you are suitable. Searches leave a mark on your credit history and many applications could signal you have financial problems. It may be better to avoid new credit products at least 12 months prior applying for a mortgage.

You have too much debt

Try to bring down any existing debt commitment prior to applying for a mortgage and reduce your monthly expenses as much as possible.

Payday loans

Payday loans, like any other type of credit, stay on your report for 6 years, even if you have cleared the debt. Due to the circumstances under which consumers normally require a payday loan, lenders could determine that you may not be able to budget and manage a mortgage responsibly.

There are administration errors on your credit file

Many details are entered automatically and mistakes on credit files are very common. It is possible to fail a credit application due to poor credit marks or data errors on your credit file that are not yours. You can get these put right by contacting the relevant credit reference agency.

You have a low income

The amount you can borrow is determined by your income and the deposit you have available. If your income levels do not match the amount you wish to borrow, you may be better trying to get a smaller mortgage. Alternatively, you could find out if you qualify for shared ownership or  one of the government help to buy  schemes.

You don’t match the profile the lender is looking for

Some lenders have a specific demographic they want to lend to. Always research the mortgage market prior to making any application or use a specialist broker if your circumstances are not run of the mill, such as if you are self-employed or if you are a contract worker. An independent mortgage adviser may be able to give you a better idea of the type of borrower lenders are looking for.

If your deposit is too small

Lenders require a deposit for most mortgage products but the amount required varies from lender to lender. The amount of deposit you have available will also affect the rate you are offered.

Where to go for help if your mortgage application is declined?

If your mortgage application gets declined, there are a number of things you can do to improve your chances of getting approved next time. Research lenders and target your applications only to those lenders who match your requirements. Remember every application could show up on your credit file.

Check your credit file with the credit reference agencies (Experian, Equifax and CallCredit) to see what information they have about you and reasons why you might have received a decline.

If any of the information on your credit report is wrong, you can apply for a notice of correction by contacting the credit agency.

A professional mortgage broker or independent financial adviser who specialises in mortgages has regular dealings and updates from a wide selection of lenders. They will be aware of what different lenders require before offering a mortgage and will process an application on your behalf.

If you are trying to get a mortgage, or  planning to in the future, it’s important to make sure your credit file is as healthy as possible. Credit Angel helps you do this by providing an accessible way to view your information.