Lenders may be less likely to lend to you if you have been unreliable when borrowing in the past.
So does this mean that you will find it hard to secure a mortgage?
We find out whether a negative credit history can stand in your way of buying your dream home.
Why does my credit history matter?
Your credit history plays a key part in a lender’s decision on whether to lend to you. It can ultimately affect the mortgage deal you’re offered – and whether your application is accepted at all.
Lenders use your credit history to assess your suitability for the mortgage you’ve applied for. It helps paint a picture of the type of borrower you are.
For example, if you’ve previously been late with or missed your payments, lenders will see this when they check your credit history. And it’s negative marks like these that can put lenders off lending to you.
But having a patchy credit history doesn’t necessarily mean that you will not secure a mortgage deal. It may just mean that you’ll pay more interest or be offered a lower amount than you hoped to borrow.
Is it in shape?
If you have a poor credit history and don’t plan to apply for a mortgage for a while, it may be best holding off applying for now. By waiting until your credit history has improved, you might be in a better position to get the deal you want.
However, if you are unable to wait, there are lenders who specialise in lending to people with a negative credit history. Be aware, though, that taking this route means you’re likely to pay a lot more interest.
It’s important to have a good look around. Without weighing your options up first, you could settle for a poor deal. You can seek financial advice from a mortgage broker, who can look at the range of deals available to you that suit your circumstances and that they believe you’re eligible for.
Lenders access your credit history through one or more of the three credit reference agencies - Experian, Equifax and Callcredit.
By keeping an eye on your own credit history, you can see whether it’s improved or ask to have errors amended. The good news is that each of these agencies offers a free credit-checking service, which you can find out more about here.
What else will lenders consider?
How well you’ve managed your borrowing in the past is not the only thing that will be checked. Lenders will also look at your income and expenditure to check you can afford your mortgage repayments before agreeing to lend to you.
If you haven’t already, work out how much spare cash you have left each month after taking into account all your other outgoings. This is the amount you’ll have left to put towards your mortgage repayments.
Keep in mind, too, that lenders will carry out a stress test. This is to check that you’ll not only be able to afford your mortgage repayments at the rate they offer, but also that you’ll be able to pay them if interest rates go up. This is known as a stress test.
If you’re worried your credit history isn’t as strong as it could be right now, hold off applying for a mortgage until it starts to improve. You can do this by keeping up with all your current credit agreements and working to reduce these balances by making your repayments in full and on time. This way, you might be in a better position to grab the mortgage you want when you do apply.
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