Why is Credit Score Important for Securing a Mortgage?fjpinvestment
Lenders’ requirements for obtaining a mortgage vary widely, and there is no standard or desired credit score that must be met. There is, however, one item that is necessary throughout: proof of financial responsibility, which can be discerned from your credit rating.
Lenders want to make sure that the borrower/s will be able to pay back the loan on time each month. Lenders conduct credit checks on potential borrowers as part of the mortgage application process to ensure their financial stability. In order to determine if they have any outstanding obligations, this will check their credit history. Whether or not someone keeps up to date with their financial commitments will show up in someone’s credit history.
Here we review what kinds of things mortgage lenders look for in a credit rating and what can be done to optimise your rating to maximise your chance of being accepted for a mortgage.
Credit score basics
Someone’s creditworthiness can be determined and quantified by a number that reflects how trustworthy and financially responsible they are. Lenders can use this data to help them decide if it’s a good idea or not to grant loans like mortgages. They want to figure out how likely it is that someone will pay back the loan by looking at their own history as a guide.
To get a credit score, you need to know your payment history (for example, how much you’ve paid on your credit card), your income and expenses, any loans you’ve had previously, and whether or not you’re on the electoral roll.
UK lenders employ three credit reference agencies (Experion, Equifax, and TransUnion), which may also be used by individuals to verify their own credit scores. Depending on the information they have on you, each of these organisations generates a unique credit score for you.
Deciphering your credit score
If you want to purchase a house, you’ll need to keep an eye on your credit score. Even if you don’t plan on making any major financial decisions in the near future, it’s always a good idea to be aware of your credit score.
Credit rating agency Experian has determined (2019) that about 50% of UK residents have never checked their credit rating worthiness, and the youth (18-24) percentage is even less than this, amounting to 72% who haven’t yet done so.
This reveals that much of the British population is not only not in the habit of monitoring their credit score, but they are also uninformed of the amount of money they might save if their score were to improve. If someone’s credit score improves by only one band, Experian forecasts that the annual percentage rate (APR) provided on a loan may drop by at least 2%.
“Our annual consumer research reveals that the public’s awareness about credit scoring and the role it plays in their finances remains relatively low. Getting to know your credit report means you can understand what’s affecting your score so you can start to manage it and access the best deals. That means if an individual improves their score band from Poor to Fair, they could save an average of £381 on a 4-year loan of £6,000, as they would likely be paying a lower interest rate.”
In order to get a mortgage, you need to have a decent credit score. The difference that separates a “good” or “bad” score could be the gap that determines whether you are successful in securing a mortgage.
In spite of the fact that there is no one universal credit score, each credit reference agency will have a different scoring algorithm. The better your credit rating, the higher your score will be. A person’s personal credit score is determined by their financial history and behaviours.
According to Jamie Johnson, CEO of FJP Investment, “A low credit core rating will result in lenders’ being more reluctant to lend as the applicant will be deemed higher risk of defaulting on repayments. If this happens, a higher deposit may be required, and the lender will charge a higher interest rate to compensate for the higher risk involved. Alternatively, the lender may refuse outright to lend, deeming the risk too high.” Furthermore, your credit score will also help the lender decide what type of mortgage they are willing to offer you, such as a 95% mortgage or a fixed rate mortgage.
The two types of credit checks lenders use
A mortgage in principle agreement must be obtained before applying for a mortgage. Using a credit check, you may get an estimate of how much money you may be eligible to borrow. There are two types of credit checks available to lenders to determine if you are suitable for a mortgage: “soft credit checks” and “hard credit checks”. There are some important differences between these two checks, and you need to be familiar with them.
A soft credit check is a precursory credit check. Only a portion of your personal information will be visible to the lender. Other lenders can’t see the results of this credit check, and they won’t know about it. It doesn’t affect your credit score or how easy it is for you to get new credit in the future.
This is the point at which a lender gets a complete picture of your credit report. A hard credit check will leave a “footprint” on your credit report, and it will affect future applications. You don’t want to look desperate for a loan, so too many hard checks will be detrimental.
Given the above effects of having a hard check, make sure to ask your mortgage lender what type of credit check they are planning on doing before applying to obtain a mortgage in principle agreement.
Does a “good” credit rating score mean a guaranteed mortgage?
The UK does not demand a specific credit score or rating to get a mortgage. As a result, different lenders have different minimum credit score requirements for approving a mortgage application. Another factor to consider is your lender’s method of calculating your credit score.
You may find out your credit score from any of the UK’s credit reference companies, which all use their own unique rating systems. These are the three major UK credit rating agencies’ scoring systems:
“Good” credit score rating: 420 to 465
“Excellent” credit score rating: 466 to 700
Maximum credit score rating: 700
“Good” credit score rating: 881 to 960
“Excellent” credit score rating: 961 to 999
Maximum credit score rating: 999
“Good” credit score rating: 604 to 627
“Excellent” credit score rating: 628 to 710
Maximum credit score rating: 710
Your credit score has an impact on whether or not you get a mortgage, and the higher your score, the better the chances are. If you have an “excellent” credit rating, it can give you access to a larger variety of mortgages and good rates.
However, remember that your credit score will ultimately be based on how well you have managed your finances in the past. If you have a decent credit score, it doesn’t mean you’ll get an automatic mortgage acceptance from your lender. When it comes to determining whether or not you qualify for a mortgage and how much a lender is prepared to loan you, additional considerations such as your work, financial obligations, and whether or not others are financially dependent on you will all come into play.
What if you have a low credit score?
Most mortgage applicants who receive an unsatisfactory or bad credit score on their checks are unlikely to secure a mortgage with a mainstream lender. They will likely be rejected due to being deemed too high a risk of defaulting on repayments. And for those that are successful, they are likely to only secure a mortgage with high interest rate repayments and low benefits.
At this point, you may be wondering what kinds of things will affect your credit score. Well, there are numerous things that will affect it, but the most common ones include the following:
- One that pops up a lot is not managing to keep up with credit card payments every month. Make sure to make at least the minimum required payment to stay on track with your credit rating.
- For example, you may have purchased a new TV or oven on hire purchase and failed to make the monthly payments.
- Not keeping up with paying your utility bills when they are due. This one, unfortunately, may become more prominent due to recent spikes in energy prices, particularly come April 2022 when the price cap is changed and customer energy bills rise significantly. And later in 2022, the energy price cap will be reviewed again. To compound the situation, UK National Insurance rates are on the rise and price inflation in general is having an impact.
- Lastly, when you use too much of your available credit, this is called “credit utilisation.” This basically means keeping your available credit below 30% utilisation. To illustrate, if you have a limit of £1,000 on your credit card, keep the spending on it to a maximum of £300.
However, when someone has come back with a poor credit rating on their checks, they will still be able to secure a mortgage with a specialised mortgage company that deals with such a situation. The disadvantages of this are that you will most likely need to save a larger deposit and, of course, you will have to pay a higher interest rate.
As a result, taking out a mortgage with a poor credit score will end up costing you more in the long term. Securing the services of a mortgage broker may be helpful if you’ve been denied a mortgage or are concerned about how your credit score may affect your application. A mortgage broker can help you determine which lenders are the best fits for your particular credit profile.
If you have done a personal check on your credit score in anticipation of taking out a mortgage and discovered it’s not as good as you would have liked, don’t panic. There are still things that you can do to improve your credit score.
Ways in which to improve your credit score rating
There are a lot of things you may do to improve your credit score, whether your present score is “poor” or if you want to raise it to “excellent”. Many of them may seem obvious, yet they all go into determining your credit rating. The difference between a high and bad credit score might be as little as one missed payment.
Making at least the minimum credit card payment each month can go a long way towards helping you stay on track. Indeed, just a single missed payment could result in your credit score being dropped by as much as 20 points or more. Making the minimum payment also applies to any debts that you are currently paying off.
It can be easy to forget to pay bills on time when you have so much gone on in your life, especially when things are financially tough. Setting up direct debits can help tremendously. Once they are set up, all you have to be concerned about is making sure there are sufficient funds in your account. Direct debits greatly reduce the likelihood of payments being missed.
Another thing worth checking is that the details on our credit file are all correct, and this includes your up-to-date address. You’d be surprised that just one small, inaccurate detail can have a significant impact on your score.
Now for something that you should try and avoid doing. Do not take out payday loans. Payday loans are high-cost, short-term loans, and they will not do you any favors. These types of loans will hurt your credit score and cost you a lot of money to get.
When it comes to credit cards, they can help your credit score as long as you are sensible with them and don’t overdo it. Keep up with the monthly payments and use it from time-to-time.
This next one has caught many unsuspecting people by surprise: financial associations. Be vigilant about who you have financial accusations with, as their poor credit score will also affect your credit score. A financial association occurs when you take out credit jointly with someone else.
Lastly, if you haven’t already done so, be sure to register to vote and join the electoral roll at your current address. This will help improve your credit score. For those that haven’t yet registered, or if you need to update your address to your current one, you can do so here.
If you have a poor credit score for some reason, don’t beat yourself up about it. It is probably more common than you think. Most people, at some stage in their lives, go through tough times and make financial slip-ups. It’s just part of life. However, there are things that can be done to improve your situation and get you back on the right track.
The most important thing is to stay positive and have a plan of action in place. And don’t forget that if you do have a poor credit score, it’s advisable to speak with a mortgage broker with experience of this, as they can help advise you and put you in contact with mortgage lender specialists that are there to help you. Good luck!