Credit score for a mortgage: all you need to know
Most of us dream of getting onto the property ladder and owning our own home. No more worrying about whether your landlord wants to sell up, no more asking someone else if you can decorate your home, no more paying for someone else’s mortgage. Just you, your home and your own mortgage. Except, it is not quite so easy to get a mortgage, especially if you have a less than perfect credit score. In fact, your credit score can be the difference between being able to get a mortgage and not being able to get one. This is why you need to look at how to build a good credit score for a mortgage, before starting to look for your dream home.
However, the concept of credit score is well, more than a bit confusing to many people. It is something that most of us have heard of, we know that not paying things can affect it and we know you need a good one to get mortgages and other forms of credit – even getting a mobile phone contract can be out of the question if you have a poor score. But other than that, it is something that seems a little bit abstract.
If you are scratching your head and wondering how you can check your credit score, what sort of score you need to get a mortgage and what to do and what not to do when it comes to improving it, fear not. Here, we have the low down on credit scores for mortgages.
What is a credit score?
Everyone in the UK over the age of 18 has a credit score. You do not have to apply for it. Essentially, it tells you whether you are low risk or high risk when it comes to paying back money that you have borrowed, whatever form that money may come in. Different lenders have their own criteria that they assess potential borrowers against, but they all will use the information provided by one of three credit agencies in the UK: Experian, Equifax and TransUnion (formerly CallCredit). There are other services where you can pay a fee to access your credit score – Clear Score being a pretty well-known one.
Most people’s credit score falls somewhere between 250 and 999, and no one ever starts from zero.
How is your credit score calculated?
There is no absolute format or definitive list, which is why there is always so many unknowns and uncertainties about credit scores. The credit agencies, for obvious reasons, keep this information close to themselves, but there are some things that we know have an impact on your rating. These include:
- Whether you are on the electoral roll – if you are not on the electoral roll, your credit score can take a hit. Potential lenders can verify your name and address through the electoral roll, and it helps to verify your identity.
- How long you have been living at your home address: the more that you move house during a short time period, the more it will impact your credit rating.
- How long is your credit history. While everyone gets a credit rating at the age of 18, it does not really ‘kick in’ until you start using some financial and other services. If you are in your 30’s and have never had a mobile phone contract, credit card or any form of credit whatsoever, it is going to look a little iffy on your credit record.
- How many forms of credit you have: Strangely enough, having different types of credit – a mortgage, a credit card, a mobile phone contract – looks positive to lenders, as it shows that you can manage your finances.
- Whether you are good at paying your bills – Every time that you default on a payment, wether it is a loan repayment, your mobile phone contract, your store card, it creates a black mark against your credit rating.
These are only a few of the things that a credit agency can consider when establishing your score. If you want to find out more about how your credit score is calculated, check out our article here.
What is a good credit score?
Credit scores can range between 0 and 999. Different credit agencies rate their scores differently.
- Very poor: 0 – 560
- Poor: 561 – 720
- Fair: 721 – 880
- Good: 881 – 960
- Excellent: 961 – 999
- Very poor: 0 – 278
- Poor: 279 – 366
- Fair: 380 – 419
- Good: 420 – 465
- Excellent: 466 – 700
- Very poor: 0-550
- Poor – 551 – 565
- Fair: 566 – 603
- Good: 604 – 627
- Excellent: 628 – 710
As you can see, there are some significant differences between how scores are rated depending on the credit agency. Lenders will also have their own criteria to assess potential borrowers against.
When it comes to getting a mortgage, the higher your score the better. A fair credit score might get you a mortgage. But if you have a good or excellent score you can select between providers, get better terms and save a lot of money on the total cost of the loan.
What can negatively affect your credit score and ability to get a mortgage?
We covered some of these above, and there are some fairly surprising ones that people are often unaware of, such as moving house too often in a short period of time or not being on the electoral roll. However, most people are aware of how debt can influence it.
If you have missed payments or made late payments, this will put a black mark against your name, so it is important to make sure you keep up to date with payments – especially those from other lenders including loans, credit cards, mobile phone contracts, store cards and catalogue payments.
Some of the more serious things that can affect your credit score and thus your ability to obtain a mortgage, or at the very least a mortgage with reasonable interest rates are bankruptcy, county court judgements (CCJ’s) and individual voluntary arrangements (IVA’s). CCJ’s can happen when a creditor has taken you to court for repeatedly defaulting on payments. You can decide to have an IVA against your name when you feel like your debt has gotten out of hand. These, along with defaults, will remain on your credit report for six years.
Applying for lots of different forms of credit in a short period of time also raises a red flag for would-be mortgage lenders. If you are financially stable and secure, why would you be urgently trying to obtain credit? That is what they will ask, so it is wise not to apply for too many things in one go.
What will lenders take into account when considering you for a mortgage?
Just like credit agencies keep their requirements and algorithms close to their chests, mortgage providers do the same. This makes it pretty tricky to know beforehand whether you are likely to get a mortgage or not. Mortgage brokers can be helpful here, though; they generally have a wealth of experience with multiple mortgage providers and know what they look for in an application for credit.
Generally speaking, most mortgage providers will have a common ground when it comes to making decisions about who can get a mortgage. Some are stricter than others, so before applying for a mortgage, do your due diligence and make sure you are applying for one that is more likely to accept your circumstances, however good or bad they are. Again, a decent mortgage broke can help you with this.
The three things that pretty much every lender will look at when considering you are:
- Loan to value (LTV) and amount for deposit
- Affordability, based on your incomings and outgoings
- Credit score and report
However, meeting these three criteria for eligibility does not necessarily mean that you will be accepted for a mortgage.
A higher credit score demonstrates your ability to pay bills on time and make existing debt repayments. A mortgage provider will reward you for this by offering you lower interest rates. However, anything less than good, and you will end up paying more. If your credit score is poor or very poor – well, you might want to think about putting your plans for applying for a mortgage on hold and doing what you can to improve your credit score. Of course, there are mortgage providers that may offer borrowers with bad credit a deal, but these are few and far between and require specialist advice.
How can I improve my chances of getting a good mortgage?
So, above, we looked at the three things that a mortgage provider will look at when considering whether to accept you for a mortgage. It makes sense, then, to check that all three of these things are in perfect order when applying to buy a home.
The bigger the deposit that you have, the better. After all, it means that you do not have to borrow quite as much, making you a little bit of lower risk. You will also benefit from lower interest rates. The best rates are usually available for those who have 35% to 40% of the value of the property. If you can only save up 10%, you will have to pay more. If you are a first-time buyer, look at a Help to Buy ISA to get you off on the right track.
If your bank statements show that you can’t afford a mortgage, well, they are not going to give you one. Do what you can to maximise the amount of money coming into the household and reduce your expenses. Reduce your outgoings if you can before you apply. Unfortunately, if you are self-employed or are on a zero-hour contract you’ll have even more hoops to jump through. The lack of guaranteed income makes it tricky to know whether you are going to be able to afford a regular mortgage payment.
Build up your credit history
Ironically, NOT having any credit is detrimental to your report. If you have never borrowed money, your potential mortgage provider can’t check if you can pay it back. If you don’t have much of one, look at taking out a credit card or a mobile phone contract – something that you know you can pay off without any problem. Wollit also helps you to build up your credit history each month.
Look at your debts
First of all, check your credit score with one of the agencies that we have listed above to make sure there are no hidden nasty surprises or anything that does not appear to be right – occasionally, people are hit by fraudsters and this impacts their credit scores.
Before applying, clear off as much of your debts as possible and close any accounts down that you no longer use. Also, make sure that anyone who is going to be tied into the mortgage with you – your partner, for example, has no debts that will hold you back.
Applying for a mortgage is a tricky process even for those with a perfect credit score. After all, you are applying for a significant amount of money for a long period of time. Your provider will want to make sure that you are not going to pay late or default on your payments.
Preparation is the key – preparing your income and outgoings so that they are as high as possible and as low as possible, checking your credit score and doing everything that you can to improve it. Get rid of any old debts and save up to get the biggest deposit that you can. By doing all of these, you are increasing your chances of being accepted for a mortgage and getting the best deals on the market.