Your credit history is a significant deciding factor when trying to borrow money, because it shows lenders, including mortgage providers, how reliable you have been with other credit products.
Under almost any circumstance, you need a credit check in order to get a mortgage, but if you are worried about bad credit, there are ways to improve your chances of being approved.
Since the 2008 financial crash, there have been stricter regulations and restrictions placed on the financial sector, including how mortgage applications are approved, so getting approved for a mortgage is more difficult than it once was.
The key areas that mortgage lenders will look at as a part of your application are:
One of the main changes to mortgage rules since the late 2000s has been the introduction of stricter affordability criteria checks. Mortgage providers are required to look at your income, but also your lifestyle expenses and how that will impact your ability to make your monthly mortgage repayments.
They also check whether you could cope financially if you experienced a sudden change of circumstances, such as a death in the family or losing your job.
Having a sensible overhaul of your finances well in advance of applying for a mortgage will help you demonstrate financial stability. Create a budget, reduce your daily living expenses where possible, you don’t really need five tv subscriptions and a daily Costa, and being careful now will benefit you in the long run.
Mortgage statistics show that the size of your deposit is a major determining factor when lenders decide how much to give you. This is because it determines the loan to value ratio (LTV) of your borrowing.
If you buy a home costing £250,000 with a deposit of £50,000, your deposit is 20%. This makes the amount you need to borrow £200,000 from the mortgage lender - 80% of the full cost of the home (or 80% LTV)
On the same £250,000 home, if you managed to save a deposit of £100,000, you would only need to borrow £150,000, making your LTV 60%.
Each lender will have a maximum LTV that they are comfortable with for your circumstances, so a larger deposit may sway a borderline application. You will also be offered a better rate of interest, the lower the LTV, so a larger deposit will help you save interest on the mortgage loan.
Your credit report shows lenders your history with financial products such as loans, credit cards, overdrafts and even utility and mobile phone bills. If you regularly pay your debts on time, and you don’t have a large amount of outstanding debt, you should have a very good credit score.
No matter what your credit history, mortgage providers carry out a credit check. Even if there is just one missed payment or county court judgement (CCJ) could make it more difficult for you to get a mortgage with some lenders.
However, each lender has their own idea of what an acceptable credit file looks like, and generally the more severe and more recent the credit issues, the more likely they are to impact your mortgage application.
Mortgage applications need a credit check because they help determine how risky it is to lend to someone, especially as the borrower is asking for such a large sum of money, usually to be repaid over a long period.
If you have a history of bad credit, a mortgage lender may turn you down, as they feel that there is a risk of you repeating the behaviour that led to bad credit in the first place.
Lenders or your mortgage broker will usually run a credit check at the mortgage in principle stage. This is a pre-approval that shows how much the lender is likely to lend you based on an initial look at your circumstances. At this point they typically use a soft-search.
Another search is run when you put in the full application, although this will be a hard-search, and this is what helps them to determine that they are willing to lend to you. They will then offer you a mortgage, or not, on the basis of the result of this search, as well as your wider financial circumstances.
Some lenders may also run a final search later in the application process, either just before or just after you exchange contracts or prior to completion. Not all lenders do this, however, and it’s more likely that this will be carried out if there were concerns earlier in the application.
A soft credit search does not leave a footprint on your credit file, so it won’t be visible for future creditors to see. A hard credit search does leave a footprint on your file. Whilst a single footprint won’t affect your credit score, multiple hard searches over a short period of time will appear as though you are desperate for credit and perhaps unable to get it.
This will be an immediate red flag for other lenders, so can impact your ability to get a mortgage with other providers down the line. Using a mortgage broker can avoid multiple hard searches on your credit file, as they can ensure you only apply with lenders that they are confident are likely to approve your application.
Your credit score is a number based on positive and negative factors in your credit history. If, for example, you are registered to vote at your address, that counts as a positive mark and your score goes up. On the other hand, if you missed a payment on a credit card, that’s a negative mark and your score goes down.
There are three main credit reporting agencies in the UK, Experian, TransUnion and Equifax, as well as Crediva, who operate slightly differently. Each one uses a different scoring system, so whilst their methods are comparable, a low score with one agency might not numerically seem to be low with another.
To get a whole picture, many mortgage providers actually obtain your sredit report from each of the major agencies and combine them to provide their own credit overview. It’s therefore useful to know and understand all of the information credit reference agencies hold about your prior to your application.
Every lender has its own appetite for risk, and preference about which agency or agencies they obtain your credit reports from. This means that there is no one minimum score that is necessary to get a mortgage.
There are also bad credit mortgage lenders who are much more open to applicants with bad credit, so not having a score high enough for high street lenders doesn’t necessarily rule out you getting a mortgage altogether.
Of course, generally a higher score means that you have a greater chance of being accepted and a lower score means you have a greater chance of being rejected, but it’s a lot more complex than that. Some lenders are willing to look at how old the problems are, how much money you owe and who to, as well as the reason for the negative mark.
Some credit issues will be viewed far more negatively than others, for example, having a single missed payment to a mobile phone company is unlikely to mean your application is refused, whereas multiple recent CCJs for missing secured loan payments will be more problematic.
It’s always a good idea to look at your credit reports in detail before you apply for a mortgage, as this can help you identify any areas that could be an issue, and give you an opportunity to improve your score.
Here are a few simple steps you can take to improve your credit score:
Make sure you are on the electoral roll at your current address
Pay off any outstanding debts that you can afford to, or look to reduce your total borrowing to less than 50% of your combined borrowing limit if not. So, for example, if you have a £5,000 limit on your credit card and a £1000 overdraft, you would want your balances to be below £2,500 and £500 respectively
Close down credit cards, store cards and any other accounts that you are no longer using. This includes any accounts you have with financial links to others that you are no longer linked to, for example, an ex-partner who you may have shared a bank account with
Check the accuracy of all of the details held about you, incorrect addresses and other details can cause an issue, but there can also be inaccuracies with what the agencies have recorded as a negative mark. If you can prove that a late payment was not your fault, for example, due to postal strikes or an accounting issue at the creditor’s end, you can sometimes request to add a note to your file to explain this
You can also take out specific credit cards designed to build your credit score – these are most helpful if your score is low due to not having used much credit in the past. However, you must use it sparingly and pay it back in full and on time to prove that you can handle debt responsibly
Studies examining financial inclusion in the UK have, unfortunately, found that people from minority backgrounds are more likely to be denied credit than those who identify as being white British.
The Equal Act 2010 protects your rights as a consumer, making it illegal for a creditor to discriminate based on certain characteristics, including race, religion, colour, nationality, gender identity, sexuality, marital status, pregnancy status, disability and age.
Thankfully, more leading banks and building societies are becoming aware of issues of financial inclusion, and measures are being put in place to ensure the financial workforce represents people from a wide range of backgrounds. However, if you feel you have been unfairly treated with a credit application you can contact Equality Advisory Support Service (EASS).
When it comes to mortgages, bad credit is a spectrum, so it’s not as simple as saying that if you have bad credit you won’t be able to get a mortgage. Amongst the main high street lenders there is a degree of variation in their criteria and some are willing to look at less severe credit issues such as default and CCJs when they are two to three years old, and/or have been satisfied (debt has been cleared).
There are even certain mortgage providers who specialise in offering bad credit mortgages and are more willing to receive applications from customers who don’t have a perfect credit rating. They are sometimes referred to as subprime lenders and are not always as easy to find as mainstream banks.
A mortgage lender that specialises in finding mortgages for people with credit problems will have access to a wide range of bad credit lenders, so it’s absolutely worth taking their advice, as the chances are, they will be able to find a willing lender that you wouldn’t otherwise know about.
Of course there are drawbacks to getting a mortgage with bad credit, as you will typically pay a higher rate of interest and/or may be offered a slightly lower loan amount. It’s a good idea to compare the deals available to you now to those that may be available if you wait until your credit record is in better shape, before making a decision.
Another option for those with bad credit are guarantor mortgages. If you’re lucky enough to have a close friend or relative with a very good credit rating and ideally a property of their own to guarantee the mortgage for you, then this could be an option.
The person acting as your guarantor will need to fully understand the risk and responsibility that they are taking on if you can’t afford to keep up with repayments. If you can’t afford to keep up payments, your home and their home could be repossessed.
Taking out a guarantor mortgage can allow you to get a mortgage if you’ve been declined due to bad credit, because you failed affordability criteria due to a low income, or because you can’t afford to save the size of deposit you need. You can read more about guarantor mortgages in our guide.