Mortgages and Credit Scores: What You Need To Know

There's no magic "pass score" on your credit rating that means you will or won't get a mortgage. But it's a very important factor in whether you'll be offered property finance, and what interest rate you'll be charged. 

So it’s important to understand how credit ratings work, and how yours could affect your house-buying process.

What is a credit score and why is it important?

For lenders, offering finance on property purchases is all about managing risk. What they like is solid, reliable borrowers who will keep paying their mortgages month in, month out without any drama. That's low-cost for them, so they can advertise attractively low interest rates and draw in more customers. 

If you miss a mortgage payment your lender is immediately alerted and they'll chase it up straight away. That process starts costing them money. And if the worst comes to the worst and they end up repossessing your house to get their money back, that's more cost to them, plus bad publicity. So those are the potential borrowers they want to avoid.

A credit score (a number from 300-850) is an aggregated number compiled from a variety of sources, that's used by a wide variety of lenders - including mortgage lenders - to assess how reliable you are as a borrower. It has a direct impact on whether or not a lender be willing to give you a mortgage, and how much they'll charge you for it. 

What's included on my credit rating?

When checking your credit score, companies will be looking for...

• Your listing in any public records, including...
• Your inclusion in the UK electoral register, with your current address
• All the bank and savings accounts you have, and their balances
• In-store credit cards in your name, and how much you owe on them
• Car lease agreements
• Partners you are "financially associated" with (as a co-signatory on a mortage or lease agreement, joint credit cards etc). Shared rent doesn't count. 
• Any missed payments
• Any CCJs (County Court Judgements for non-payment of debt) or home repossessions

What's NOT included on my credit rating?

It's also important to know what won't be included in a credit check, such as...

• Any student debt you may have
• Your marital status
• Any political affiliations 
• Your medical history
• Any criminal record (a CCJ is not a criminal record)

How can I improve my credit rating?

You might think that NOT having any regular credit commitments (hire purchase / store cards / car payments etc) would make you a more desirable borrower.

But no.

What lenders want to see is that you can manage debt (because a mortgage is a debt that you will be taking on). 

One way to improve your credit rating is to ensure that you have at least one household bill with your name on it - this builds a history of you making payments on time, which can stand you in good stead when applying for a mortgage. 

What else do lenders consider, as well as my credit rating?

Banks and building societies don't just look at your credit score before deciding whether to approve your application. You might have a squeaky-clean credit rating but that doesn't mean you can afford a million-pound mortgage.

For home purchases, lenders are required by regulation to consider "affordability": whether you are going to be able to comfortably afford the level of borrowing you're applying for, considering your salary (or your combined salaries), the stability of your employment, and your other spending commitments (such as gym memberships, school fees, other mortgage payments...).

So what does this mean for self employed, or contract workers? 

It certainly doesn't mean that you're excluded from being able to get a mortgage - just that you'll need to prove your earning history. Some lenders will request this for only the previous six months, while others may want up to two or three years worth of proof that you earn enough to afford to pay back the mortgage. It's all about the individual lender and borrower, so it's best to get in contact with a broker and explain your situation - they will know which lenders to approach and which to avoid. 

What's a "good" credit score?

If you’ve looked up your credit score and you're wondering what it means, the general consensus of lenders is that:

• 800-850 is an "excellent" score
• 740-799 is "very good"
• 670-739 is a "good" score
• 580-669 is "fair"
• 300-579 is a "poor" score

With a score rated "good" or above, you should be able to get a mortgage from most lenders, at a competitive rate, providing you also meet their affordability criteria.

What can I do to improve my credit score?

It may seem counter-intuitive, but it's better to have some regular credit obligations than none. Your credit-worthiness is not about being debt-free but your ability to manage debt, since a mortgage is a long-term debt that you will be taking on. 

So if all other things are equal, but Afia has no credit obligations, and Chloe has a credit card and a store card that she repays the balance on completely every month, Chloe's credit rating will be better. 

Other things you can do to improve your credit score inclulde: 

• Make sure your addresses on all accounts are up to date
• Get yourself on the electoral register
• Don't run your accounts right up to your creidt limit
• Make sure you don't miss any payments on any bills (watch out for direct debits that might not be paid for any reason)
• Make sure you don't (or haven't) apply for any store cards for the previous 12 months
• Don't open a new bank account in the previous 12 months
• Make sure you don't have any "red flag" payments showing up regularly on your account statements, such as online gambling accounts

If I have a bad credit score, can I still get a mortgage?

Yes. There are lenders that are still very willing to lend to a borrower with a few black marks on their credit score, though they may charge a slightly higher interest rate. 

But which lenders, and how much more might it cost you?

This is when it really pays to use a mortgage broker. Many borrowers come to us having been knocked back after going through the standard mortgage application procedures with one or two high-street lenders applying one-size-fits-all lending criteria. 

• They've often wasted valuable time in the application process, and are now at risk of losing the purchase they're hoping to make.
• A well-connected broker has access to all the lending criteria of the mainstream lenders, and also private, niche lenders only accessible through borkers who can be more flexible in their lending decisions. A broker can quickly compare rates and costs across the whole market and take your application straight to a lender who will look favourably on your situation.
• A mortgage broker That’s why it’s important to talk to a mortgage broker – they will know which lenders to approach once they know your situation.
• For example, some lenders will happily lend to someone with a poor credit score if the reason for the poor credit has since been resolved, but the score has yet to catch up.

How do I check my credit rating?

There are three free services available in the UK: Equifax , Experian and TransUnion (previously known as CallCredit).

• You can use their free credit check services (don’t feel obliged to sign up for their subscriptions).
• Checking your credit score yourself doesn’t affect your rating.
• Not all lenders report your credit details to all three credit agencies, so to be sure there aren’t any surprises lurking you do need to check all three of them.

Does it affect my credit score if I check my own rating?

Any checks you carry out yourself will be known as a soft check - this will not affect your credit rating. Hard checks, however, might. That's why it's important to know the difference between hard checks and soft checks, and know what a footprint is. 

A soft check

This may also be referred to as:

• a soft search
• a background check
• a pre-application check
• a quotation search
• an eligibility check

It’s a preliminary search by a lender:

• to check your identity
• when a lender wants to show you your eligibility for a new financial product
• it can be done without your permission
• your own searches of your report are soft searches

You can have unlimited soft searches without it affecting your credit score:

• soft checks are recorded on your credit history for 12 months
• only you can see them
• they’re not visible to prospective lenders

A hard check

This is when a potential creditor does a full review of your credit rating. They need to have your permission to do this, but you may give implied permission to carry out a check by applying for a loan or opening an account, such as with a mobile phone provider or a mail order company.

A landlord or an employer must get your express consent to check your credit record. A debt collection agency “inherits” the permission to check your credit report that you gave to the original lender.

When a potential creditor “pulls your credit” (checks your rating) it may also be referred to as:

• a hard pull
• a full credit check
• a hard inquiry

A footprint

This is the record of lenders having checked your rating, which are visible to other lenders (and to you). They don’t have a negative impact on your credit score, but they may nonetheless affect your chances of being approved for credit.

There are hard and soft footprints!

• A “hard” footprint is left by a creditor checking your application for a loan or credit: it stays on your file for 12 months and then disappears.
• A check by a debt collection company leaves a footprint on your record for 2 years.
• A loan stays on your account for 6 years – whether you’ve repaid it in full or defaulted.

• A “soft” footprint (such as a search of your partner or spouse’s credit record if you have a joint bank account) disappears immediately.
• You can access a record of the soft searches carried out on your credit report over the last 2 years.

How we've helped clients with less-than-perfect credit scores

• Low-deposit mortgage for a self-employed borrower with a poor credit score
• Extending remortgage borrowing to repay credit cards and negotiate a better mortgage rate
• 5x salary mortgage despite car loan and credit card debt

Get expert help on managing your credit score with a mortgage application

Are you concerned that some black marks on your credit rating will prevent you from getting affordable property finance? This is exactly when professional advice could be invaluable. Call us for a no-obligation scoping discussion and one of our advisors will be able to tell you what we can sort out for you:

Our mortgage service

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