Mortgages and Credit Ratings

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You’ve spend years squirrelling away money for a deposit and weeks scouting out neighborhood’s—the gardens, the schools—and comparing mortgage rates and are now ready to obtain a loan for the property of your dreams. And now is when that time you took out a credit card after university and fell behind on the payments, or failed to keep up with the bills on a broadband package, may come back to haunt you, leaving you with a credit rating that may make you ineligible for a mortgage with some lenders, or at least ineligible for the best mortgage rates.

There isn’t a specific minimum credit score you need to secure a mortgage. Different lenders will have different criteria for assessing applicants, and different mortgage products will have different minimums. Ultimately a credit score tells a lender how much of a risk you’ll be to lend to: the higher your score, the more likely they’ll judge you to keep on top of payments and not default. A score lowered by previous loans you’ve defaulted on or by holding many unused lines of credit can alert a lender that you might not be a reliable, trustworthy, financially stable customer to lend to.

In general, the better your credit score, the more mortgage options that will be available to you and at better interest rates. But the exact numbers vary. To see how your credit report will impact your mortgage options, let’s take a closer look at credit scores and what to do if yours is bad.

Credit Scores

There isn’t one universal credit score for all your financial dealings and history. There are rather three credit agencies in the UK—Experian, Equifax and Callcredit—which will issue you independent scores, on different scales. These scores are based on your past borrowing, your use of your available credit, missed payments, presence on the electoral roll, and other factors.

  • Experian: Issues credit scores of between 0 and 999, with a score over 961 considered excellent, giving you access to the “best credit cards, loans and mortgages (but no guarantees),” Experian says. A score between 881 and 960 is considered good and will qualify you for most mortgages but you may be rejected for the very best offers. Anything below 560 is considered poor and Experian warns you’ll likely be rejected for most mortgages.
  • Equifax: issues credit scores between 0 and 700, with anything above 466 considered excellent and 420 considered good and the UK average standing at 389. A score below 279 is very poor and may make you unable to find a mortgage.
  • Callcredit: issues credit scores between 0 and 710, with a score above 628 considered excellent and above 604 considered good. A score below 550 is “very poor” and will limit your mortgage options.

Before you apply for a mortgage, or even for a mortgage agreement in principal, you’ll want to obtain your credit score yourself, to see what your potential lender will see. You won’t waste time applying for a mortgage with a “very poor” score. You may also be able to make simple fixes, including getting your name on the electoral roll and closing unused lines of credit, including store credit cards, to improve your credit rating before you make a mortgage application. Alternatively, if your score is poor because you have little credit history, you might want to take out a credit card, put some purchases on it, and pay it off entirely every month to build up credit and then obtain a new score in a few months.

Getting a mortgage with bad credit

But if you have a poor credit score, either due to poor money management in the past or because you have little credit history, all hope isn’t lost. You can take steps to improve your credit score and barring that, you can seek out a specific bad credit mortgage. You’ll have to accept a larger interest rate, because lenders will see you as a risky prospect for a loan. A whole of market mortgage broker can help you identify a mortgage deal that suits your financial circumstances, but be aware that you’ll pay more.

Additionally, building up a larger deposit, and borrowing less, can persuade lenders you’re a better prospect and may make you eligible for mortgages you won’t otherwise be with your credit score.

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