We all know that buying a home means more than choosing an area, browsing "for sale" listings and monitoring sold property prices. For many, it also means saving hard - often for years - and then having to apply for a mortgage. And no matter how sizeable your deposit, getting approved for a mortgage is not a tick-box affair. In particular, lenders are now legally obliged to stress-test your finances to be as sure as possible that you will be able to keep up with your repayments should interest rates rise or your income fall. How they make this assessment is often something of a mystery to many applicants. This is unfortunate, as to have the best chance of being approved, it's important to know what lenders are looking at.
While your income, employment status and regular expenditure are all important, much of the relevant information that lenders focus on is found in your credit record.
Q: Where can I find my credit record?
A: Three main credit reference agencies operate in the UK: Experian, Equifax and TransUnion. Each of these agencies holds a file on most adults in the UK. Some files are almost empty because the subject has no credit history. Others contain much more information - although, crucially, not all of it is necessarily accurate or up-to-date. The contents of each file translate to a credit score.
Q: What information will my credit report show about me?
A: (a) your name and any other names you've used or been known by in the past six years;
(b) your current address, including your postcode, and any other addresses you've lived at over the past six years;
(c) your date of birth;
(d) if you're registered to vote;
(e) how much you owe on credit cards, loans, overdrafts and mortgages;
(f) whether you've made any late credit payments;
(g) whether you've missed making any credit payments.
Q: How do lenders use my credit report to decide whether or not to give me a mortgage?
A: Different lenders operate different criteria. What is important to one lender may be of less significance to another. This makes second-guessing their decision-making process tricky at best and downright impossible at worst. However, it may help to know what information goes into this decision-making process. It has four main strands:
(a) the lender's own lending policy. You should never assume that one lender's lending policy bears any similarity to another lender's policy. Always check the small print;
(b) the information asked for, and given by you, on the mortgage application form;
(c) any information the lender held on you prior to your mortgage application. This might be because you've made prior credit applications to them or because you hold a bank account with them;
(d) the information collated on your credit report. This includes both publicly available data (for example, any County Court Judgments made against you or any Individual Voluntary Arrangements that you've entered into) and your credit history as recorded on your credit report.
Q: Should I get a credit report from all three credit reference agencies?
A: It's sensible to keep a check on your credit record at all three agencies simply because UK lenders have no obligation to report relevant data to all, or indeed any, of those agencies.
Q: What credit score do I need for a mortgage?
A: There's no one answer to this question. This is for three reasons:
(a) every applicant's circumstances are unique;
(b) every lender imposes different lending requirements on their borrowers;
(c) the main UK credit reference agencies all use different scoring scales. They may also have access to slightly different information.
Broadly speaking, the higher your credit score, the better your credit. As a result, you're likely to be viewed more positively by lenders and hence have access to more favourable mortgage products, interest rates and loan length terms.
Q: Can I ask a lender which credit reference agency they use?
A: Yes, you can. However, the answer may not narrow your search field, as it isn't uncommon for lenders to use two or more different credit reference agencies. In addition, of course, the omnipresent risk of identity theft and consequent fraud makes it sensible to monitor your accounts at all three agencies.
Q: Do I have to pay to see my credit report?
A: Although all three credit reference agencies offer subscription services, they all also have a statutory obligation to share salient information. You can request a "statutory report" without paying a fee.
Q: How can I improve my credit score?
A: Even a "good" credit score may not be good enough to give you access to the best mortgage deals. A "poor" score (and remember, what counts as "excellent", "good" or "poor" varies between lenders) may make getting a mainstream mortgage impossible. While it is sometimes possible to obtain a mortgage with poor credit, it will almost certainly be on terms that are far less preferential than are ideal. This may push your house or flat search into a different neighbourhood - towards a smaller home and/or into a lower price bracket. Alternatively, it could make sense to work at improving your credit score. Yes, there's a risk that sold property prices could rise while you're doing this, but, ultimately, a better credit score has the potential to put you on a more secure financial footing. Think about:
- checking you're registered to vote at your current address;
- restricting or eliminating other credit applications (too many can raise questions about your creditworthiness - or level of desperation);
- check your borrowing history as recorded on your credit record very carefully, and dispute any inaccuracies;
- pay down as much debt as possible (not unnaturally, lenders prefer would-be borrowers with a low debt-to-income ratio);
- pay your bills on time;
- close inactive credit accounts but don't be afraid to keep older accounts open, as judicious use of these can demonstrate your ability to make repayments over long periods of time;
- request the removal of any out-of-date financial associations - for example, an old joint account with an ex-spouse.
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