Here are the key factors that lenders look for when making their decision to approve your mortgage
Your credit score will tell lenders how reliable you have been—and are likely to be—when borrowing money. However, since lenders differ in their decision making, there is no guarantee that a good credit score will secure you a mortgage, nor that a poor credit score will prevent you from being approved for one. Here is everything you need to know about your credit score when applying for that mortgage.
What is a credit score?
A credit score indicates to lenders or agencies whether you are reliable when you borrow money. Based on how good you are at managing repayments, for instance, credit reference agencies will give you a credit score. When you make positive financial actions, such as consistently paying off your loans on time or using your credit card responsibly, your credit score is improved. On the other hand, negative financial actions, such as going over your agreed credit limit or missing payments, will have a damaging effect on your credit score.
But depending on the credit reference agency, your credit score could vary, since every agency uses its own scoring system. In other words, there is no such thing as a universal credit score for anyone, because every lender interprets each potential borrower’s history slightly differently. While the majority of lenders and agencies follow similar criteria to see how good your credit history is, what is classified as a major red flag for some may not necessary be judged so harshly by others.
How do lenders make decisions?
Generally, lenders do not all think in the same way, with decisions differing due to various factors. There are, however, some key factors on how lenders make their decisions, i.e., factors that most lenders have in common. They include the following:
- Information that is on your credit report, such as your public record data and your credit history. These include IVAs and CCJs.
- Information that they will likely already have on you, such as your bank account information, if you already have an account with them.
- Their own lending policies, though these could differ from those of another lender.
- Information that you have provided them on your application form.
What is considered a good credit score?
Because, as mentioned above, every credit agency and lender uses a different scoring system, there is no such thing as a credit score that is good right across the board—or that guarantees you a mortgage. In most instances, however, the higher the score, the better off your chances will be. Here is a rough estimation of what each of the biggest CRAs consider a good credit score:
- TransUnion: 604 to 627
- Equifax: 420 to 465
- Experian: 881 to 960
For the top-of-the-line mortgage rates, the biggest CRAs look for these credit scores, which reach the “excellent” category:
- TransUnion: 628 to 710
- Equifax: 466 to 700
- Experian: 961 to 999
Keep in mind that having the best credit score you possibly can does not guarantee you an approval on your mortgage application. This also means that having a bad credit score does not necessarily mean you will fail to qualify, either. Lenders will make their assessment on more than just your credit score.
How many years of credit do I need to have a good score?
Mortgage lenders will usually review the most recent six years of your credit history, so if, for example, you are younger and have only a few years’ worth of credit to review, most lenders will be more cautious and may not lend to you. There is no set time frame, however, that will increase your credit score automatically. For instance: a 22-year-old person with a stable job and who uses their credit card sensibly (and who, in other words, makes repayments regularly) will likely have a superior credit score to a 55-year-old who carries a lot of debt.
The best thing to keep in mind regarding your credit score is this: you will require more than several years of credit to increase your credit score—these years of credit must be good credit. It is most likely that you will have to wait for poor credit markets such as IVAs, CCJs, bankruptcy and other red flags to be wiped prior to being accepted for a mortgage.
Are there any mortgage providers that don’t use a credit score?
Yes. Mortgage providers that will accept you with negative marks on your credit record or a poor credit score do exist. One example of a mortgage provider that will accept you with poor credit is Buckinghamshire. They will also accept you with small County Court Judgements, otherwise known as CCJs, so long as they are more than six months old, as well as an Individual Voluntary Arrangement, or IVA, if you have repaid it more than five years prior.
A specialist mortgage broker or provider who works with customers with poor credit will be able to provide you with expert advice when seeking the best rates. They will be able to tell you how to find products that suit your financial situation and improve your chances of being accepted for a mortgage.
