Does Credit Rating Affect the Chances of Getting a Mortgage?

28/05/2020

Your credit rating has a significant impact on your chances of getting a mortgage. Not only will your credit rating have an effect on your chances of getting a mortgage overall, but it can also have an impact on the rates you could end up paying for your home loan.

Your credit rating is one of the main factors lenders will look at when evaluating your application and as part of the mortgage underwriting process. It provides a key insight into your borrowing history, and the way in which you manage your finances. As taking out a mortgage is one of the biggest financial moves a person can make in their lifetime, lenders will be careful to check that you have shown in the past to have sufficient skills necessary to take on such a major financial move.

Lenders will check this to ensure that you will be able to follow through with the repayments for any sum of money they could provide you with. When applying for a mortgage, it’s important to know what your credit score is in order to properly evaluate how likely you are to be accepted for a home loan with specific lenders.

Credit ratings when it comes to mortgage applications are vital and thus, understanding just how it can affect your chances of getting a mortgage are key. Moreover, improving this score to further your chances of success in getting a mortgage application or other loan approved is of equal importance.

How Does My Credit Score Affect My Chances of Securing A Mortgage?

Your credit rating is one of the main factors that lenders will use to determine whether you are worthy of borrowing money for anything, from personal loans to second mortgages. It shows your history of financial management and mismanagement and borrowing and it evaluates your creditworthiness.

There are three major Credit Referencing Agencies (CRAs) in the UK who build up your credit rating.

What Do Mortgage Lenders Need When I Apply for a Mortgage?

When applying for any mortgage, you will have to provide the lenders with evidence to show how much you earn, and whether this is sufficient enough to manage the potentially substantial repayments on the home loan.

However, simply proving your income is not enough to prove to lenders that you are able to make repayments, as it only shows that this is possible; not that you are competent enough to properly manage your finances to make these repayments. To properly assess this, your credit report and history is examined, as it provides lenders with the closest insight into your relationship with money, and management of this.

If a lender sees that you earn enough to manage the repayments, but have a history of poor financial management even with a comfortable salary, you will be, in their eyes less creditworthy and less likely to make the mortgage repayments. This in turn will make lenders less likely to accept your application, as you are deemed to be a higher risk and thus less likely to make repayments.

How Do I Check My Credit Score?

Credit scores are determined by the three major Credit Referencing Agencies in the UK (otherwise known as CRAs). These agencies are:

1.     Equifax

2.     Experian

3.     TransUnion (formerly Callcredit)

You can check your credit ratings with these three agencies by visiting their websites. Each of these three agencies have different numerical scores for the universal five categories of value:

Very poor – Equifax 0 to 279, Experian 0 to 560, TransUnion 1

Poor – Equifax 280 to 379, Experian 561 to 720, TransUnion 2

Fair – Equifax 380 to 419, Experian 721 to 880, TransUnion 3

Good – Equifax 420 to 465, Experian 881 to 960, TransUnion 4

Excellent – Equifax 466 to 700, Experian 961 to 999, TransUnion 5

What Happens if I Have a Bad Credit Rating?

Although this makes lenders less likely to loan money to applicants, it does not completely rule them out from borrowing or securing a mortgage. Some lenders may offer specific home loan deals for borrowers with poor credit histories.

However, these deals and arrangements will typically come with significantly higher interest rates than standard residential mortgage or second mortgage rates. This is to provide lenders with additional security when lending money to applicants with a poor history of borrowing who are a greater lending risk.

Alternatively, if you do not wish to pay higher interest rates on your mortgage than a standard applicant would, another option would be to improve your credit score.

Although not a short-term solution, by taking the time to build up your credit score, you could avoid higher repayment charges to your home loan, in addition to an increased chance of success when applying for a mortgage with lenders.

How Can I Improve My Credit Score for a Mortgage? 

There are many different aspects of your finances that the CRAs will factor in to your overall credit rating. All elements that this rating comprises of will shed light onto your relationship with money and general financial management. Considered factors include:

  • Whether or not routine payments are made (rent, bills etc.)
  • What your history is with borrowing (e.g. have repayments been made on time or have they been delayed).
  • Whether you have had any ‘hard searches’ that have affected your credit score.
  • Ensuring you maintain successful management over these aspects can help to boost your ratings with the three CRAs

As a mortgage is secured against your home, your home could be repossessed if you do not keep up the mortgage repayments. Think carefully before securing other debts against your home.

Why not call us for free? 0800 0831593