Considering purchasing a property? Need a mortgage before you can do it? Well, a little thing called a credit score could be the deciding factor in whether you get accepted. But what score do you need? Below is everything you need to know about credit scores and mortgages before you start applying. 

What is a Credit Score?

When you lend money to a friend or family member, how do you know you are going to get it back? Well, you never know for sure, and you just need to trust them most of the time. But, what if there was a number, for example, out of 100, that would alert you to the likelihood of them paying you back? Well, that’s basically what a credit score is.

Each person has a credit score that paints a picture of how reliable they are at borrowing money. Lenders will report the reliability to three main credit reference agencies, Experian, Equifax, and TransUnion, and they will determine the credit score. 

These agencies are all separate from each other, so you won’t see the same score on each platform. However, they will still provide you with the same idea of how good your credit score is to lenders. For example, Experian provides people with a score out of 999, Equifax is out of 700, and TransUnion is out of 710. 

Your credit score is affected by positive and negative actions. Positive actions will help your score go up and include things such as paying off loans on time and not spending recklessly using a credit card. Negative actions can include missing payments or going over your credit limit on a regular basis. 

It’s good to remember that scores are not universal. The best way to check how well your score is doing is by using checkmyfile. You not only get a credit score based on all three agencies, but a whole credit report that alerts you to ways you can improve it. 

It’s important to note that we receive a commission of £12 for each applicant who signs up using the link provided above. If you haven’t used the Checkmyfile credit report before, you’ll still receive a free 30-day trial.

The Importance of Credit History

We’ve already delved into what a credit score is, but a credit history is slightly different. Instead of a number stating the probability of you paying back a lender, it is a record of how you’ve managed money you’ve borrowed over time. Some of the factors it may include are the number of credit cards, loans, and overdrafts you’ve had, how much you currently owe any lenders, what you have owed in the past, and whether you’ve paid on time, and why missed or late payments, defaults, or bankruptcies. 

So, why is a credit history important for getting a mortgage? The main answer is that when you apply for a mortgage, lenders want to know that you’re reliable and will pay them back. If you are, they will most likely accept you no problem. However, if you have a bad credit history, they may think you’re more of a risk and decline to give you a mortgage. 

A good credit history could:

• Improve your chances of being approved for a mortgage
• Give you access to better interest rates and terms

A poor credit history could:

• Make it harder to get approved
• Lead to higher interest rates or needing a bigger deposit

Basically, a credit history could be the make or break to you getting approved for a mortgage. That’s why it’s important to build up your score, stay on top of any loans, and ensure the likeliness of being accepted.

What Credit Score Is Typically Needed?

There’s no ‘set’ credit score that will get you approved for a mortgage. It’s a bit more complicated than that. Credit scores vary between credit reference agencies, and score requirements are different for every lender or broker. However, a general rule of thumb is that you should have as high a score as possible. It’s important to note that having a high credit score alone doesn’t guarantee mortgage approval, as there are other factors involved, like individual lender criteria.

If you are looking at your score on Experian, you most likely won’t get many mortgages with a score below 560. If it’s below 720, you may get accepted for a mortgage, but usually with high interest rates. Above 880, your chances of a mortgage with reasonable interest rates increase. As you hit 960, you could get most, but not all, mortgage deals. From there up to 999, you will get some great deals with low interest rates. Source

Equifax and TransUnion will have a similar ranking system with their credit scores as well, but they are slightly different from Experian. For Equifax, a score between 420-465 is deemed ‘Good’ and a score above 600 is ‘Good’ for TransUnion. Source

Lenders will often want you to have a ‘Good’ credit score or above. However, most of them don’t state an actual number required. Instead, most of them require you to have no County Court Judgments (CCJs). Other things they might look for (i.e., Barclays, Halifax, HSBC) could be free from Individual Voluntary Arrangements (IVAs), bankruptcy, or arrears. 

The credit score requirements may also vary depending on the type of mortgage you’re looking to get. For example, fixed-rate versus tracker mortgages might look for different levels of lending responsibility. The same applies to high loan-to-value and low loan-to-value mortgages. 

If you’ve just checked your credit score and see it is ‘Fair’ or even ‘Poor’, you don’t have to give up hope completely. There is a chance that these scores may qualify under certain conditions. However, you should expect to be offered a mortgage with a high interest rate. 

Understanding Internal Lender Scoring

If you have a bad credit score, you may also be happy to hear that it isn’t the only deciding factor when getting approved or declined for a mortgage. In reality, lenders have their own internal scoring systems. These are models they’ve built themselves to assess your risk using a much larger set of data, going beyond your credit score. They will look at these next to the score and make the final decision about whether they will offer you a mortgage and what the interest rate will be. 

Every lender or broker has their own system to decide. However, these are the most common factors they will look at:

• Employment status and history: When you’ve been working in a good job for a long time, a lender will view this more favourably than if you are unemployed or changing jobs monthly. 
• Deposit amount and source: If you are willing to put down a larger deposit from your own savings, you are more likely to be seen in a better light by the lender. However, the source matters too. If it comes from family or friends, it may be viewed less favourably.
• Debt-to-income ratio: Every person who applies for a mortgage will have a debt-to-income ratio. This is how much debt you have each month compared to your income. The lower the ratio, the better your chances of getting a mortgage. 
• Property type: There are certain properties that are seen as higher risk, so a lender is less likely to give out a mortgage for them. One example is a flat above a commercial premises. 
• Stability indicators: Some things that don’t involve money are taken into account too. This could include being on the electoral roll or having a stable address history. 

How Credit Scores Affect Mortgage Products and Rates

Having a good credit score is one of the ways to help you get approved for a mortgage- and on your terms. For example, if you’re looking at purchasing that beautiful two-bedroom semi-detached property down the road from you, it’s more likely to be to be a competitive interest rate. 

If you are known for late payments to credit card lenders, or you have a large amount of loans you’re paying off each month, it may mean you’ll be looking at lenders that have slightly higher interest rates or reduce your borrowing. The better your credit history, and the higher the score, the more likely you are to get the most favourable interest rates and loan conditions. 

As we’ve mentioned, a desirable score not only influences the likelihood of getting the mortgage, but it may impacts the terms and conditions attached to the mortgage repayments. These include:

• Interest rates: The higher your credit score, the more likely you’ll receive an offer with lower interest rates. This makes your overall mortgage payment more affordable. 
• Loan amounts: If you can prove you’re reliable at paying back loans with a desirable score, you might be able to approach lenders with higher income multiples. 
• Negotiation power: You are in a better position to negotiate with lenders, if you have a good credit score.

How to Improve Your Credit Profile Before Applying

There are various strategies you can take to enhance your credit score and land the right mortgage for your situation. The first thing you need to do before you start looking at properties is to ensure you review your credit reports and score. There could always be a mistake that is lowering your score, and rectifying it could make all the difference. Again, your credit report is one factor in many that could determine your product and rate.

You may also consider performing a soft credit check before you apply for any new credit (or your mortgage). This helps you understand the likelihood of being accepted without impacting your score. This is because applying for loans and being rejected can lower your score, which is not what you need when you’re trying to improve it. 

These actions are fundamental to improving your score as quickly as possible and making you as attractive to lenders as possible. 

Final Thoughts

Applying for a mortgage can be an exciting yet stressful time in your life. However, you can make it as seamless as possible by ensuring you have your credit score in good standing before you apply. Even if you don’t have the best credit, it’s good to know that there is always the possibility of still being accepted for a mortgage, you just might have to agree to higher interest rates. 

Don’t let the fear of rejection stop you from purchasing your dream property. No single number defines your eligibility, and preparation is key. Follow the information in this guide, to help you moving forward in your property search.

Your home/property may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it. 

There may be a fee for mortgage advice. The precise amount will depend upon your circumstances and will be agreed with you before proceeding, but we estimate it will be £395.

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