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Is your credit rating good enough for a mortgage?

Category: Mortgages
Author: Leanne Macardle
Updated: 25/01/2019

At a glance:

  • Never assume your credit score is high enough without checking before you attempt to apply for a mortgage
  • There are several ways to calculate a credit rating, so you may want to err on the side of caution and check with multiple credit report providers
  • Avoid borrowing within six months of your application, and use this time to do what you can to increase your score – the higher the score, the better your odds

After years of saving for a deposit, months of hunting for the dream home and countless hours spent searching for the perfect mortgage, there is still one major hurdle to get over in the quest for homeownership - a good credit history. However, it seems that too many would-be buyers in the UK are underestimating this crucial aspect, which means they could be disappointed when they sit down to make a mortgage application.

Bigger is better

As a general rule of thumb, the higher your credit score, the higher the chance that you'll be accepted for a mortgage – and if it's poor, you'll be rejected. It's worth bearing in mind that different lenders will use different criteria to score your credit-worthiness, which is why it's recommended to not only check your credit rating, but to check it with several different credit reference agencies to get an accurate idea of your ultimate eligibility.

As these credit check providers don't all use the same scoring system, there's no general advice possible as to what score you should aim for – Experian considers 961 an excellent rating, for example, while Equifax 'only' requires 500. Remember that you don't need to pay to get these scores; many agencies offer free trials and others don't charge anything for a simple score overview, so it's worth signing up to check your report and then, where necessary, cancelling your subscription before you're charged.

Beware of credit score overconfidence

Many people may be under the impression that their credit score is great, especially if they've never borrowed any money, had a credit card or even dipped into their overdraft. However, they may be sorely mistaken, as people without a credit history will likely not have a good credit rating.

That's because companies will have no reference to base these forever-in-the-black customers' lending behaviour on, which makes them risky – and lenders try to minimise risk wherever they can. Instead, if you have a history of using a credit card and paying it off in full every month, you are likely to have a much better score than someone who's never had a credit card. So, you may want to take out a credit card now if you're planning to buy a home in the next year or so.

Of course, this isn't the only red flag lenders look out for when it comes to potential customers, and those with a spotty borrowing record are still likely to have a worse score than those with no credit history at all. That's why those thinking of taking out a credit card for the first time would do well to treat it with caution, and keep a close eye on their score.

Credit history warnings

Those with a history of borrowing should be aware that even if you've never missed a payment on any credit card or loan, meeting just minimum payments on your debt could be interpreted as a sign of financial stress. Additionally, taking on additional borrowing could worry lenders that you'll over-extend yourself by adding a mortgage to your debt burden.

Many lenders would want to wait and see if you could handle your increased debts before agreeing to grant a mortgage. They're required to thoroughly assess what you can reasonably afford to borrow and are obliged by law to adhere to strict lending criteria, so applicants should be aware that even something as simple as a single missed payment could be the difference between being accepted or declined.

Tip: While you'll want to decrease your borrowing as much and as fast as possible, this could be easier said than done. If you have debt from several sources, you may want to consider consolidating this in a personal loan. It will give you one single debt payment to focus on and remove the temptation of borrowing more on credit cards (provided you remember to cancel and cut these up).

Improving your credit

If you're hoping to climb onto the property ladder and your credit score isn't great, you need to take action. While getting a better credit history is by no means an easy feat, here are some steps you can start with to make sure that your record is as good as it can be:

  • Take a look at your credit report. If there are any discrepancies, or items you don't agree with, talk to the credit reference agency you're using straightaway.

  • Try not to increase your borrowing at least six months before you make your mortgage application. It's also a good idea to bring your overall credit usage down from a year ago. Lenders will want to see whether your borrowing limits have increased or decreased year-on-year.

  • Make a budget and stick to it. New mortgage affordability rules mean that your spending and account management will be checked – try to save a little each month and end with a surplus.

  • Meet all your repayments and, ideally, pay more than you need to. This will demonstrate to lenders that you are capable of repaying your debts, which will boost your credit score.

To find out more about the mortgage application process, and how to give yours a welcome nudge in the right direction, check out our guide: Improve your chances of getting a mortgage.

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.