What credit score for a mortgage do I need to buy a house? A successful mortgage may depend on your credit score. Read on to learn more about credit scores, credit files and the role they play when lenders are considering your mortgage application.
What is a credit score?
A credit score is a tool that lenders use to assess your level of risk when applying for a mortgage, loan, credit card or service. Your credit score is determined by the information a credit reference agency gathers in your credit report. A mathematical model is used to interpret the data in your credit report into a score, and the score indicates how well you have handled credit in recent years. This is a trusted way of getting an idea of whether or not you are likely to have the discipline to commit to a financial product like a mortgage and forms a key component of a lender’s assessment of your application.
Credit scores range between 0 and 999. Your exact score is determined by a number of factors on your full credit report, including:
- Your total debt and available credit
- Your personal history of credit payments
- How many credit searches you have had recently by third parties
- Public records including the electoral roll and County Court Judgments (CCJs)
Your credit score will be negatively impacted by issues like late or missed payments, defaults, individual voluntary arrangements (IVAs), CCJs, bankruptcy and repossession. You can also do things to improve your credit score like joining the electoral register or keeping up with monthly repayments. Ultimately, the better your credit score is, the higher your chances of accessing the very best rates for mortgages, credit cards and loans will be.
Note that all credit reference agencies use the same methods to calculate your credit score. However, lenders will usually use your credit report to calculate their own score, and they all take a slightly different approach. Therefore, the score from a credit reference agency is a good indication of where you stand but it may not be exactly the same as a lender’s assessment.
What is a good credit score?
As previously mentioned, credit scores range from 0 to 999. Certain ranges are considered to be different in terms of how good the score is. According to Experian (https://www.experian.co.uk/consumer/guides/good-credit-score.html), a credit score of 721-880 is classified as ‘fair’ or ‘okay’. If your score is between 881 and 960, it is considered a ‘good’ score. And if you manage to score in the 961-999 range, you have an ‘excellent’ score and will be able to access the best possible deals on mortgages, credit cards and loans.
The scores for the other main credit reference agencies are a little different:
- Fair: 380-419
- Good: 420-465
- Excellent: 466-700
- Fair: 566-603
- Good: 604-627
- Excellent: 628-710
With a higher score, the greater the range of choices you’ll have when applying for a mortgage or other form of credit. For example, a fair credit score may have a reasonable interest rate and loan to value (LTV), but a good score will unlock lower interest rates and a higher LTV. By the same token, an excellent credit score will mean you can explore products with better rates and highest LTV. It is in your interest to get the best credit score you possibly can.
What is a bad credit score?
The average person tends to fall somewhere between 300 and 850 in their credit score. If you have credit issues that occurred within the last 6 years then they will probably have some impact on your credit score. This includes having numerous credit checks and rejections from lenders or credit cards suppliers. It is a good idea to take care of your credit profile wherever possible since bad credit issues stick around for some time and can be a real obstacle when it comes to applying for mortgages or other forms of credit.
Bad credit scores from the main credit reference agencies are as follows:
- Very poor: 0-560
- Poor: 561-720
- Very poor: 0-278
- Poor: 279-366
- Very poor: 0-550
- Poor: 551-565
Who are the main credit reference agencies?
There are three main credit reference agencies in the UK and these are the ones whose credit reports lenders will use. They are:
- TransUnion (formerly CallCredit)
Generally speaking, it is a good idea to check your credit score with all three. You don’t need to be concerned about over-checking your own credit report; your personal checks are not recorded, so only you and the credit reference agency will know about them. Regularly check all the details on your credit reports to ensure everything is accurate. If you spot an error on any of the reports, contact the agency and have it amended as soon as possible.
You are legally entitled to check your credit report. If you or short on time, look at Experian (as it is the biggest of the agencies) or get a free trial of CheckMyFile to view all three in a single place.
What does the Experian Credit Report tell you?
Your Experian credit report will contain detailed information about the ways you have used credit in the past. This will include the amount of debt you currently have and whether or not your bills have been paid in a timely manner. If you request your credit report from Experian, you will find details of the following:
Personal information: Your full name, including aliases or reported misspellings, your date of birth, your National Insurance Number, your address history, current phone numbers and employment details.
- Accounts: This will cover all your credit accounts, meaning things like credit cards, mortgages, loans and finance on purchases. Your creditors will be listed, as will the account numbers, balances, payment history and current status of the account.
- Public records: This will include things like the electoral register, IVAs, CCJs and more severe issues like bankruptcy.
- Recent enquiries: A list of recent requests from creditors to view your credit report.
There are a number of keys details about you that will not be included in your credit report. These include:
- Marital status
- Current income level
- Balance of your bank statements
- Level of education
Note that the information in your credit report may vary if you are using other credit reference agencies like Equifax or TransUnion.
How do lenders make their decisions?
Most mortgage lenders keep their true criteria a closely-guarded secret. This can make it slightly more challenging to assess whether or not you will be accepted for a mortgage. Mortgage brokers can be particularly helpful with this, since they have a wealth of experience with different lenders and understand what they are looking for in a credit application.
Generally speaking, there is common ground that will apply to the vast majority of mortgage lenders when it comes to making lending decisions about applications. Though this common ground exists, you must understand that the level of strictness will vary widely between lenders and the best way to feel confident you are approaching the right lender is to work with a specialist mortgage adviser.
Here are the areas that mortgage lenders will assess when making a decision:
- Deposit amount and loan to value (LTV)
- Affordability (based on your income/outgoings)
- Credit score and report
So, if I meet these minimum credit scores, I’ll be accepted for a mortgage?
Meeting the credit score criteria alone will not be enough to guarantee approval for a mortgage. The other factors listed above are equally important, or even more important, to lenders’ calculations. To maximise your chances of being accepted for a mortgage, you will want to have a good credit score, a significant deposit to put down and an income requirement (with minimal outgoings). This will stand you in good stead to be approved by a wide range of lenders.
Having said that, meeting the credit score requirements for a broad range of lenders will open you up to more options for mortgage products. As we’ve said, the higher your credit score, the more mortgage products you will have access to. It is unlikely you will be able to secure the best possible rates for a mortgage if you don’t have a good-excellent credit score.
The more likely you are to pay bills and make existing debt repayments on time, the lower the interest rates on your mortgage could be. If your credit score falls short of the ‘good’ or ‘excellent’ categories, you may end up paying more. If your credit score comes up as poor or very poor, you may want to rethink your financial situation and plans.
If your credit score falls into these ranges, it may not be the right time to apply for a mortgage. Waiting to buy your home is never an ideal situation but if you take a little time to improve your credit score you could save a lot of time in the long-term. You may also be able to save up a more substantial deposit that will enable you to access even better mortgage deals when the time is right.
It is worth noting that there are lenders who will consider approving a mortgage for applicants with bad credit. The more severe the credit issues, the more likely it is that a specialist lender will be your only option. Adverse credit describes negative events that have occurred in your credit arrangements. This means things like late payments, defaults, CCJs, IVAs, a payday loan, bankruptcy and repossession.
You can also have adverse credit history if you have been over-reliant on credit, regardless of whether you have always kept up with your mortgage payment. Even with specialist lenders, there is no guarantee of being approved for a mortgage with bad credit. It is highly recommended to seek advice from a mortgage broker to ensure you place your application with the right lender and tailor it to their criteria.
Can you get a mortgage with credit card debt?
Though it is possible to be approved by a specialist lender if you have credit card debt, it is not advisable to try. If you pay off your debts you will lower your debt-to-income ratio and improve your credit score. According to Experian, this is particularly important with credit card debt.
You should also try to keep your credit card utilisation rate low – the amount of your existing debt that is made up of credit card debt will have an impact on your credit score. Many experts will recommend that you keep your credit card debt below 30% of your overall debt, but lower is better.
Can you get a mortgage with no credit history?
The reality is that an extensive credit history that demonstrates the financial behaviour to make credit repayments on time and in full will instil confidence in a prospective lender. You can further extend this positive influence by having a diverse range of account types in your credit report – credit cards, loans, mobile phone contracts, etc. This will show you have experience in successfully managing different credit obligations. If you have no credit history, it is generally viewed as a negative by lenders because it gives them nothing to go on with regards to your attitude towards debt. The aim of a mortgage application is to make lenders confident that they won’t lose money by lending to you.
If your credit report shows credit searches and not much else, lenders may view this as possible debts that have yet to make it into your account history. For all they know, you may have taken out every possible credit card and are currently racking up a mountain of debt. Your credit history is a key resource in demonstrating to lenders that you are a safe investment. Having said that, it may still be possible to get approved for a mortgage without any credit history. You’ll need the help of a mortgage broker to go over your circumstances and identify which (if any) prospective lenders might consider your application.
There are many factors that go into calculating your credit score. With regards to your bank accounts, it is a good idea to close any unused bank accounts. Similarly, if you have multiple credit cards, it is wise to consolidate that debt into a single place. Consider interest-free balance transfer cards that allow you to move debt from interest-charging cards to zero-interest ones. Beware of costly transfer fees, however.
If you have ever shared debt with another person, like a joint account or mortgage, or perhaps even a guarantor loan, your credit report may indicate a financial association with that person. Even if you haven’t seen that person in years, their name on your credit report could prompt lenders to assess their financial health. This is worth knowing and you may want to contact credit reference agencies to have a note added to the file that you no longer have a financial association or existing accounts with that person.
Improve your credit score
If you haven’t borrowed much in the past, your credit score may not be as high as it could be, even if you don’t have adverse credit issues on your file. If you haven’t registered to vote, get on the electoral roll immediately for a simple boost to your score.
One suggestion would be to get a credit card in order to build up a credit history (obviously, it’s important to keep up with credit card payments). It takes time to develop a good credit file, and the same is true for saving up a substantial deposit or building a career that earns enough to be able to get a mortgage and keep up with mortgage repayments. Knowing your credit status early on, and keeping up with it over time, can be a huge help to ensure everything is moving in the right direction. There are various things you can do to improve your credit score, and the credit reference agencies provide lots of tips and advice on their websites.
What should you do if your mortgage application is rejected?
If you have been turned down by a high street lender you must not simply move on to another and try again. You need to understand why you were rejected and reassess whether now is the right time to apply. The best way to get a better understanding of where you stand is to contact an independent, whole-of-market mortgage adviser like Think Plutus.
We are experts in everything to do with mortgages and we can identify exactly where your mortgage application fell down. From here, we can assess your financial behaviour, offer a money advice service and search the full mortgage market to find lenders and products that are a good fit for you, and tailor your application to maximise your chances of success. If we think you are not yet ready to apply for a mortgaged property, we can offer advice on what you can do to get yourself in a better position to apply then support you when the time is right.
If you have recently had a mortgage application declined or you have more questions about credit reports and mortgages, contact Think Plutus today. Our friendly team of experts is on hand to help with specialist insights and guidance.