Your credit history has much to do with getting a mortgage. Lenders will look at your credit score as well as your credit history in order to asses their risk in lending to you. Like with most loans, a poor credit score and credit history that is filled with missed payments can result in a denied mortgage application. If you have been denied a mortgage because of your credit score or your credit history, there is still hope. Luckily, there are plenty of ways you can improve your credit score when preparing for a mortgage application.
What is a good credit score for getting a mortgage?
Mortgage lenders typically want to see a credit score of that is in the ‘good’ or ‘excellent’ range of credit rankings. Each bureau has a differing scoring system, so it is good to know what each one considers good credit. For Experian, scores between 881 and 960 are considered to be good. Scores ranging from 961-999 are considered excellent. With Equifax, 465 is a good credit rating and a score of 466-700 puts you in the ‘excellent’ category. Finally, for TransUnion, a credit score of 604-627 is good and a score of 628-710 is excellent.
An excellent credit rating will obviously get you the best deals. A good credit rating will open the market to good deals, but they probably won’t have the absolute lowest interest rates. Whilst it is more difficult to get a mortgage with a fair credit score, it is likely that interest rates will be very high. Those with poor scores are often times denied a mortgage.
How can I improve my credit score?
Get on the electoral roll
Getting on the electoral roll is the number one way you can work to improve your credit score. Not being registered on the electoral roll makes it very unlikely that you will be given a loan of any kind, so make sure you are registered to vote. You can register to vote at the gov.uk website.
Check for errors on your credit report
Sometimes there may be errors on your credit report that are affecting your score. It is important to constantly check your credit report for accuracy for this reason. If you see something that is not correct, you can notify either the lender or the credit bureaus directly about this. However, it is often best to speak with the lender the debt came from directly. Often times they will be willing to work with you if the debt is indeed a mistake.
You can also contact the credit bureaus directly if you are not getting anywhere with a lender. They will investigate and decide if the debt is valid or not. Whilst it is being investigated, it shows as ‘disputed’ on your credit history and lenders cannot use this debt as a deciding factor when it comes to lending to you.
Always pay credit back on time
This is the best thing you can do to raise your credit score. Any existing debts should be paid off as best they can. Make sure you do not have any late or missing payments for at least a year on your credit report, as lenders look very closely at this aspect of your credit file. It is a good idea to put some money aside each month to overpay on your current debts, You can do this by foregoing a daily coffee from your favourite spot, cutting down on grocery bills where possible, and making an effort to cut out non-essential purchases. You can then use the money saved to work on paying off your debts so that you will look desirable to lenders.
Disassociate from anyone who has a negative effect on your credit
If you once had a joint account of any sort with someone with a bad credit history, their credit rating can affect your own. It is a good idea to contact the credit bureaus to claim that you have disassociated with anyone that may be bringing your credit score down. You can easily do this by contacting them directly. Doing so should stop their credit history from impacting yours.
Do not apply for too much new credit
Applying for new credit can bring your score down. There are two types of inquires, hard and soft inquires. Soft inquiries are typically made by credit card or loan companies to see if you are eligible for promotional offers and do not include inquiries made where an application has been submitted. Hard inquiries show any applications for credit you have made yourself. Having too many credit inquiries can bring down your score, so when planning to get a mortgage it is a good idea not to apply for any new credit for at least six months before your mortgage application.
Remove defaults, County Court Judgements or bankruptcies
After six years, negative items are removed from your credit report. This includes defaults, missing payments, judgements and even bankruptcies. Removing items from your credit report can be tricky and there are certain things that will stay for the entire six years. Some late payments may be able to be removed by contacting the lender those payments went to and either offering to settle your debt, or explaining your situation in hopes they will remove the negative marks.
If you have a County Court Judgement against you that has been settled, contact the court to review your record. If your record shows that you are no longer liable for a debt or that it has been paid, they will remove it from the Register. Be aware that this can take up to four weeks.
Bankruptcies are the most difficult to get removed from your credit report. They will also ver negatively affect your credit score. If you have a bankruptcy, it may be best to wait until it falls off your record (after six years) to go about applying for a mortgage.
What do lenders look for regarding credit history?
Good credit score - As mentioned, an excellent credit score will get you the best deals. Good credit scores will also get you favourable deals from lenders. A credit score that is below a ‘good’ rating may get you some deals, but interest rates will be very high as you are considered more of a risk.
Low debt-to-income ratio - A debt-to-income ratio is a measure of the amount of debt you have versus your income. Whilst your debt-to-income ratio does not affect your credit score, lenders will look at this to make sure you can pay back what you borrow.
The amount of credit you use is a big indictor of how much of a risk you may be. Lenders tend to look at it like this: if you have many bills to repay on your credit report, they may think you might have trouble repaying everything, and for this reason only offer deals with higher interest rates. Generally speaking, your debt-to-income ratio should be below 43% in order to get approved for a home loan. This figure takes into account your overall income as well as all current debts.
Low debt-to-credit ratio - Unlike your debt-to-income ratio, debt-to-credit ratio, or a measure of the available credit versus how much borrowing ability you have, is of importance to your credit score. Your credit score can raise or lower based on your credit utilisation, or how much credit you use. It is generally advised to keep this ratio below 30% in order to find the best mortgage deals from lenders.
A debt-to-credit ratio works like this : If you have a credit limit of £10,000 and have £5,000 used up in credit from other loans, credit cards or judgements all together, then your debt-to-credit ratio would be 50%. You can work to lower this by overpaying on some loans when the minimum payment is due and working to chip away at your overall debt.
Good payment history - Not surprisingly, lenders look very closely at your ability to repay your debts. They want to be assured that you are not a financial risk for them and will make payments on time. For this reason they look at how good you have been at repaying debts in the past. County Court judgements, missed payments and defaults do not look good to lenders, so it is best to avoid missing any payments in the months leading up to applying for a mortgage. Of course, lenders will usually let you explain a missed payment on your application, hopefully helping you to convince them that you are a safe bet for a loan.
Sufficient credit - Lenders are unlikely to lend to anyone with little or no credit history. This is simply because they have nothing to go on in terms of verifying if you are someone who pays your debts on time. It is important to build your credit so that you can qualify for a mortgage. You could do this by getting on the electoral roll, taking out a credit card and paying off the balance each month or setting up your phone and utility bills to be included in your credit report each month. You can do the latter by simply contacting your phone or utility company and asking them to report your monthly payments to a credit bureau.
Public records - Public records, such as County Court Judgements, are also looked at by lenders. They want to make sure that you have no unpaid debts that you are liable for. Making sure your public record is clear of any CCJs against you will help to keep your credit score safe.
Account information - Lenders also tend to look at the types of accounts you have which involve debt and how long you have had them. Ideally, they like to see long term accounts with a good repayment history.
Financial associations - As mentioned, negative financial associations can wreak havoc on your credit score. If you have any old joint accounts with persons who you no longer share an account with, you should notify the credit bureaus that you have disassociated from that person. Lenders want to make sure that you have no financial associations that have bad credit or poor repayment history, as this will reflect on your ability to pay and your overall score as well.
What if my mortgage application has been denied?
First and foremost, if you have not already done so, you should ask the mortgage lender why your mortgage application was declined. If it was because of poor credit history or a low credit score, take the steps mentioned in this article to improve your score before applying for a new mortgage. Each inquiry from a mortgage lender will show as a hard inquiry on your credit report. Lenders are unlikely to offer a mortgage if you have multiple denied loan applications. Whilst they will not see if a mortgage was approved, they will see that you applied for one and will be much less likely to lend to you if there are multiple inquiries for a mortgage loan. A mortgage adviser may be of help as they can help streamline the mortgage application process. A mortgage adviser can often help you put together a successful mortgage application.
You can take steps to better your financials in order to be more likely to be approved for a loan. These steps include improving your credit score by making timely payments, not applying for new credit and stretching your money further. Lenders want to see that you will repay on time above all, so having a credit report and accounts that portray that you are a responsible borrower are key. Try your best to make all required payments and curb your spending in the months leading up to getting a mortgage. Working hard to improve your credit score is a great start to getting a mortgage approved once you have been denied.