Buying a house in London means getting a mortgage and this means a credit score. The process of credit scores is something of a mystery for most of us but ensuring your credit score is correct and as good as it can be before you apply for a mortgage is important.
So, let’s take a look at the basics around credit scores and mortgages.
What is a credit score?
Credit scores are determined by two main companies (although there are others and many banks also use in house credit scoring) these are called Experian and Equifax. Each is a separate company, and each can produce a different score. Experian uses a system where you are scored out of 999 whereas Equifax only uses 700 and another company called CallCredit is out of 710.
The key is you don’t need to worry about all of them, just ensure that the information they hold on you is accurate. Even if they each give you a different score, this difference doesn’t mean you can’t get a mortgage. The scores they give are just a benchmark for you to understand how good or bad your credit score is. Your mortgage lender is unlikely to require a certain score for a mortgage but they will see all the information the credit scoring agencies have to create the score. But the better your credit score the more attractive you are as a potential customer to them.
What is a good credit score?
For starters, it is always worth remembering that the smaller the deposit you have when applying for a mortgage, the better your credit score will need to be. That’s because you are borrowing more money and therefore are a bigger risk.
With Experian, if you have a credit score of 700 or above, then this is considered a good credit score – that’s because they go all the way up to 999. However, for Equifax, a good credit score can be around the 475 mark because they only go up to 700.
Callcredit uses a different system. They give you a score based on a star rating out of five. One is the lowest while three is medium and some mortgage companies won’t accept this. Five is the highest and most lenders will consider people with this rating.
Can you get a mortgage with a bad credit score?
The general concept is that if your credit score is low, you won’t get a mortgage. But it isn’t as straightforward as that so don’t assume all is lost because your credit score isn’t very good.
For starters, lenders use more than the credit score system when looking at your mortgage. For example, if you have a good record with them as a bank or lender and you have enough money coming in on a stable basis to cover your repayments and other outgoings, they are more likely to consider you. A good-sized deposit can also improve your chances so if you have at least 10% of the property’s value to put down, this can help your case.
If you have a low credit score, then talking to a mortgage broker is the best way to understand what your options are. You can get advice on which companies might consider your case even if your credit score isn’t too good. As a general rule of thumb, if you have a low credit score your interest rates are likely to be higher, you may be asked for a larger deposit and there may not be as many mortgage products available to you.
How to improve your credit rating
Credit ratings improve slowly over time based on your details. The longer a bill goes unpaid, the worse it looks on your credit score. So, make sure bills are paid on time, try and pay all your bills by direct debit so you don’t accidentally forget and be proactive about paying down loans and credit cards as fast as you can.
The longest a negative item stays on the credit record is six years. You can also look at improving your credit rating by taking steps such as consolidating debt or getting a credit-building card but always chat with financial experts about these steps to make sure they are right for you.
As a London Mortgage Broker we have an expert team who can help you understand all of your options when it comes to buying a home, and we give advice based on your particular circumstances, including what your credit score is, and can help you get on the housing ladder or re-mortgage to a better deal.