Learn how to build your credit score, and how lenders work out just how
much you can borrow with our comprehensive borrowing & credit
How Lenders Work
In order to consider borrowing you the funds for a mortgage, the lender will need to consider a variety of factors to determine your eligibility and capacity to pay back the money they have borrowed to you.
While it is a fact that the lender is legally able to reclaim your home should payments not be maintained, this is a last and drastic step for the lender, and something that they do not wish to do unless there is no other alternative. As such to avoid repossessions becoming a more regular occurrence, a lender must calculate the following information before they can borrow you any funds for a mortgage.
Income & Outgoings Test
A lender will evaluate your suitability for a mortgage by assessing your income as well as any pensions, investments or outgoings you may have. In order to prove your income, a lender will usually require payslips and bank statements, or your business accounts if you're self-employed or tax returns.
In addition to income, a lender will also request to see information pertaining to any outgoings you may have such as credit card repayments, loans and bills. In some cases, even minor expenses such as food and entertainment could be assessed by a lender.
Beyond checking for existing financial red flags such as a County Court Judgments (CCJ), high outgoings or irregular income, lenders will also take into account the possibility for financial changes in the future which could affect your ability to repay the loan. These criteria are often vaguer than the income and outgoings test, but will usually revolve around aspects such as the level of savings available should you or your partner lose their job, increased interest rates or significant financial changes such as long-term illnesses or career breaks.
Your Credit & Borrowing Eligibility
One of the most significant aspects of how a lender determines your mortgage eligibility and how much you can borrow is your credit rating.
Your credit rating not only affects the likelihood of a mortgage application being successful, but it also influences how much your monthly repayments will be in the event that your mortgage application is accepted. As such, it is imperative to learn about your credit score and how to improve it BEFORE you begin applying for a mortgage.
Note: If you're reading this and have already applied for a mortgage before checking your credit score, don't despair, there are still ways you can get a mortgage even if you were previously rejected.
How to Improve your Credit Rating
In order to improve your credit rating, it's important that you first understand how credit scores work.
In the UK, there are many credit reference agencies which exist, who use your personal banking information to create a financial portrait of you and how well you manage credit. These agencies will give your credit a score which will determine whether you can take out loans, phone contracts, credit cards and most importantly, a mortgage.
Upon applying for a mortgage, the lender will ask these credit agencies to look into your credit report to see if you are a suitable and trustworthy client. As such, having a good credit score increases your chances of not only having a successful mortgage application but also securing more preferable interest rates.
Five Tips for Improving your Credit Rating
View your Credit Report
The best way to understand your credit report is, of course, to see it for yourself. You can request your report from the credit referencing agencies mentioned above and check to see if all the information they hold on you is correct.
It's generally a good idea to check your report regularly and especially before you make any important applications for credit, as any incorrect information could result in your score being impacted negatively.
Register to Vote
If you're not already on the electoral roll, simply registering to vote can have a significant improvement on your credit score. Depending on your rating, this could be the final part of unlocking more preferential mortgage rates.
Strictly Manage your Debt
Did you know that something as small as missing a payment by a few days could leave a negative mark on your credit report? To avoid something as insignificant as an overdue phone bill dragging your score down, it's usually a good idea to set up a direct debit to clear your owed bills on or ahead of time.
If you've never borrowed money, you may find that you have a considerably low credit score simply because you haven't proven that you can responsibly manage debt. While it is generally a good idea to avoid taking on more credit than you feel comfortable with, in these instances, it's a good idea to apply for a credit card to use sparingly and make sure you repay the balance in full every month.
While the process of building credit may take a while, you should soon find that your score will improve.
One final thing to note in regards to managing your debt is to try to keep below 50% of the amount of credit available. Keeping your used credit low will not only reduce the amount of interest you pay, but it can also make you much more attractive to a mortgage lender.
Live Within your Means
While it may seem tempting to get a credit card to buy the latest and greatest mobile phone, it's important to consider that every time you apply for credit you're conducting a 'hard search' on your credit file which could have a negative impact on your overall score if done too frequently. As such, it is considered good practice to wait for at least 6-months between credit searches before making a new application for credit or applying for a mortgage.
Patience is a Virtue
Last but by no means least, it's important to remember that it takes a considerable amount of time to build a good credit history. As such, you should take this time to save a sufficiently large deposit while you work on clearing any outstanding debts you may have.
As mentioned above, various factors can affect how much you're able to borrow. Find out
just how much mortgage you can get, and the cost of your monthly repayments, by clicking
the button below to view our mortgage calculator and get a mortgage in principle.
Can I get a Mortgage with Bad Credit?
While it is generally a good idea to build your credit up as high as possible before attempting to apply for a mortgage, that doesn't mean that you can't get a mortgage with bad credit.
Many boutique lenders have carved themselves a sustainable business niche out of delivering bespoke mortgage packages for those with bad credit. It's important to note that while both the required deposit and interest rates on these mortgages are typically higher than some of the more mainstream high-street alternatives, they can be a potential avenue to secure a mortgage if you have bad credit or faced rejection in the past.
One fantastic benefit of obtaining a mortgage with bad credit is the fact that by successfully clearing the monthly repayments, you can build your credit score, therefore giving you more chance of being accepted for more preferable rates from other lenders in the future.
My Mortgage was Rejected, What Happens Now?
While no prospective buyer wants to hear that their mortgage application has not been successful, it doesn't mean that the dream of owning home can't become a reality.
As mentioned in the section above, there are various reasons why your application could have been unsuccessful, including the price of your desired property, your credit history to even a simple mistake on your credit file and even a simple mistake in the application process.
The first and most important thing you need to do after failing a mortgage application is not to panic, and secondly do not immediately make another application. Instead of blindly applying, you should look at the reasons why your application failed, and most importantly, what you can do in the future to rectify your shortcomings.
To better help you assess where your mortgage application went wrong, it's a good idea to use a mortgage brokerage. Mortgage brokers boast an extensive knowledge of the mortgaging process and are experts in scouring the market for the best deals. As such, brokers can also help you to assess your previous application and identify not only where you went wrong, but how to fix it for a future application.