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Is your credit rating good enough for a mortgage?

Is your credit rating good enough for a mortgage?

Category: Mortgages
Author: Tim Leonard
Date: 23/11/2018

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

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.

Remember that you don't need to pay for this – 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.

Credit history warnings

One of the main problems seems to be that many people falsely believe that they have a decent credit history. According to Experian's research, 75% of would-be buyers surveyed said that they believed their credit rating was either 'good' or 'excellent', but when investigated more closely the picture was less rosy.

The research found that a quarter (27%) of those questioned had one or more missed payments on their credit report, while another 9% had defaults. A further 5% even had court judgements or insolvencies listed. Such things are likely to ring alarm bells with lenders, even if they turn out to be in error, which is why it's so important to check your credit report and challenge any errors.

Experian's research also found that first-time buyers were particularly weak when it came to borrowing credit and paying it off. Potential first-time homeowners are more than twice as likely to make only the minimum repayments on their credit cards and are very unlikely to clear the balance. Many of those questioned also revealed that they had increased their borrowing, with 29% borrowing more on credit and store cards in the last 12 months.

All of these factors could raise red flags with lenders. Meeting just minimum payments could be interpreted as a sign of financial stress, while 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 often have strict lending criteria, and even something as simple as a single missed payment could be the difference between being accepted or declined.

Missing the signs

Unfortunately, the issue could be compounded by the fact that many people are completely unaware that their credit score is less than stellar until they actually apply for a mortgage. Figures from Vanquis show that, of the one in five respondents who admitted they'd been declined credit, one in 10 had been denied a mortgage, with an additional one in 10 only realising their poor credit score when they were turned down.

Given that 43% had never checked their credit score, it's perhaps little wonder that so many were oblivious to their questionnable credentials, and it clearly highlights the need for borrowers to become more informed if they're to take that first step on the housing ladder.

Improving your credit

If you're hoping to climb onto the property ladder, you need to take action. Not only do you need to be aware of your credit rating, but you also have to take steps 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.

What next?

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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.