Your credit score is an important factor that any lender will take into consideration when you apply for a mortgage. However, it’s important to know that your score is just one part of the puzzle when it comes to being accepted.
We explain how important (or not) your credit score is when applying for a mortgage, and what other factors a lender will consider.
1) Credit history
A lot of emphasis is placed on credit scores, but whilst it is important – it's not the be-all and end-all. In fact, your credit history is much more important to lenders when it comes to applying for a mortgage.
Whilst your credit score gives lenders a rough indication as to how creditworthy you are, your credit history provides details about how trustworthy and reliable you are as a borrower. It highlights your borrowing history and personal information, as well as any past or present debts - and whether these have been paid off on time or not.
If payments have been missed, you have an IVA (Individual Voluntary Arrangement) or a CCJ (Country Court Judgement) this will show up on your credit history for six years. These negative markers can significantly affect your overall credit score, as well as your chances of being accepted for a mortgage.
2) Income and outgoings
One of the main things any mortgage lender will want to look at is your affordability. This is how much you can afford to spend each month on mortgage repayments.
To gauge this, a lender will want to see evidence of both your income and your outgoings from at least the past six months. The actual affordability criteria are incredibly in-depth and can vary from one lender to another. Lenders tend to look at things such as total gross income, any allowances you may receive, your disposable income and your credit utilisation ratio (I.e., how much you spend out of your credit limit).
Ultimately, a lender wants to protect their finances and check that you aren’t going to end up overstretched financially with a mortgage you can’t afford.
3) What you owe
Most of us have debts, but the more you have, the more this indicates to lenders that you rely heavily on credit to get by.
In most cases, a lender will assess how you handle your debts (if you pay them off on time or if you’ve missed payments), as well as how much your debts come to each month, compared to your income. This is known as your debt-to-income ratio.
As a rule of thumb, lenders prefer credit utilisation to be 30% or below (meaning you use 30% or less of your total credit limits on credit cards and overdrafts). This indicates that whilst you do owe money, it isn’t more than you can afford to pay off.
For example, if you have a credit card with a £1,000 limit, you’d be aiming to keep your balance at £300 or below. This suggests that you are a responsible borrower.
4) How much you want to borrow
The amount you’re looking to borrow can play a big part in your chances of being accepted for a mortgage. If you only have a small deposit (of 5-10%) and are looking to borrow a large amount, then you run the risk of being knocked back.
The higher your deposit, the less you will need to borrow and the better you look to any potential lenders.
If you are borrowing a lot, things such as your age, your income and your employment status will play a large part in whether you are accepted or not.
5) Deposit size
Like we said, the bigger the deposit, the more likely you are to be accepted for a mortgage. Not only will you have to borrow less (making you more appealing to lenders), but you will also have a better choice of competitive mortgage deals.
It also means that your monthly repayments will be less as your LTV (loan-to-value) is higher. Loan-to-value is shown as a percentage and represents how much your mortgage is compared to how much your property is worth. So, if you put down a 10% deposit, your mortgage will have a LTV of 90%.
6) Employment status
It’s important to any mortgage lender that they will get back the money that you have borrowed. Your employment status is therefore very important, as you are more likely to struggle with monthly repayments if you don’t have regular income.
If you have recently started a new job and are thinking of applying for a mortgage, it may be worth putting it off for a while until you become more established and pass your probation period. That way, you should appear as less of a risk to lenders.
Every lender has a different approach to how they view your eligibility but leaving your application for as long as possible should work in your favour, if you are in a new role.
7) Address history
Whilst where you live has no impact at all on whether you’d be accepted for a mortgage, how often you’ve moved houses does. If you have moved a number of times in a short period, this may indicate a number of issues to lenders. But, the good news is that you can soften the impact easily by registering to vote.
Joining the electoral roll takes a matter of minutes. It can increase your credit score and helps lenders identify you and cross-check your name and address.
8) Application history
Last but by no means least is your application history. This simply shows how many times, and how frequently, you have applied for credit in the past. It doesn’t show if you were accepted or declined.
This can include any type of credit, from credit and store cards to a mobile phone contract. The more you have applied for (particularly if those applications have been made in quick succession), the more of a negative impact this will have on your new credit application.
It’s important to note that all lenders work to their own guidelines. So, when it comes to being accepted for a mortgage – what works for one lender may not work for another. When combined with the fact that there’s no one universal credit score, it becomes clear that whilst there is a lot you can do to better your chances, you can’t predict your eligibility based on your credit score alone.
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