Getting a mortgage is not always easy, especially if you have a less-than-perfect credit score. Mortgage lenders are notoriously picky about which applications they accept and which ones they don’t.
Whilst some people apply for a mortgage, cross their fingers, and hope for the best, this isn’t the smartest way to go about it. There will be many factors which can positively or negatively impact your application that you need to be aware of.
Luckily, once you have got your head around the process, you can start working to appear more attractive to mortgage lenders, putting yourself in the best position possible to be accepted.
But what are these factors? That’s what we’ll be discussing today. We’ll look at what things you can address to improve your chances of getting a mortgage.
How to improve your chances of getting a mortgage
Each mortgage lender will have its own specific criteria when assessing an application. However, some general factors will influence your success rate.
- Having a sufficient deposit for the loan size – The bigger the loan, the bigger the deposit required. If you can show you have the required funds, your chances will increase.
- Employment status and income – A permanent employee working full time will have a greater chance of getting a mortgage as they will be considered to be a stable source of income.
- A good credit score and credit history – Your current credit score and credit history will significantly impact your chances.
- Sustainable spending habits – If you’re spending patterns are well below your income, it can show that you make sound financial decisions which will improve your chances.
- Oustanding debt – This involves student loans, credit card debt, etc. The lower your existing debts are, the lower the risk you are to lenders.
Now that you have a basic understanding of the core criteria for mortgage lenders, let’s take a look at these in more detail, and how you can make yourself an appealing candidate for a mortgage.
The starting point is your budget
If you want to get a mortgage, the first thing you should do before applying is figure out what your budget and deposit will be. In order to borrow money from the mortgage lender, you will need to be able to show that you have enough funds to put down a deposit for that amount, as well as cover the mortgage costs and fees and other costs associated with a property purchase.
The amount of money you borrow, the payback period, and the interest rate charged, will all influence your mortgage payments, so it’s imperative to ensure you can cover them.
The bigger your deposit, the better
It’s a simple fact that the bigger your deposit is, the more options and better mortgage deals you will have to choose from.
For instance, if the minimum deposit amount is 10% of the home’s value, putting down a 15% deposit instead will increase your chances significantly. This is because mortgage lenders tend to favour those who can put down more money upfront since it means they have to lend you less. It will also benefit you as it will reduce your monthly payments since you are now borrowing less than you would have otherwise.
Check your credit report beforehand
Mortgage lenders will check your credit report to ensure that you don’t have a history of missing payments and that you have the financial discipline to follow through with credit agreements. A credit report will outline details of credit card bills, loans, mortgages, overdrafts, bankruptcy filings, utility bills, etc., that you’ve had in the last six years. It will give you a credit score between 0 and 999.
This credit score, also known as a credit rating, will give the mortgage lender a good idea as to how reliable of a borrower you are – the higher the score, the better. In order to check your credit report, mortgage lenders will go through credit reference agencies.
A credit reference agency is an independent organisation that holds the aforementioned information about you. There are three leading credit reference agencies in the UK – Experian, Equifax, and TransUnion. There’s no way of knowing if the mortgage lender will ask for a report on you via the credit agency Experian or whether they will go through Equifax or TransUnion. Therefore, it’s best to get your credit report from all three, so you can understand what the prospective lender will see when they check your credit history.
By checking your credit report beforehand, you will know if you have a bad credit score or not and, thus, how likely you are to succeed with your mortgage application.
Correct credit score errors
When you check your credit report, you may notice that some details are incorrect. Before following through with your mortgage application, you’ll want to ensure that these errors are addressed and fixed as they will negatively impact your ability to obtain a mortgage.
First, check if the same error is on your credit file with all of the credit reference agencies. Suppose this error is only on your credit report with one of the agencies. In that case, you can proceed to contact them directly to get it corrected. If the error is with all agencies, the information has come from the lender, and as such, you’ll have to move on to the second step.
You can contact the lender if you have confirmed that the error is with all agencies. Most, if not all, credit lenders have a procedure in place to deal with customer disputes. By providing proof of why the data they have is incorrect, you should be able to correct the error without hassle.
In the event that it’s a default, meaning that you have stopped paying the outstanding credit, you can arrange a payment scheme with them to pay off the existing debt. As part of this, you can ask the lender to wipe the default from your credit file completely. Whilst this is not a guarantee, most lenders will be willing to negotiate this as long as you can pay back the outstanding debt promptly – at the end of the day, they are concerned with getting their money back more than anything. If they are willing to wipe the default off, this will significantly improve your mortgage chances.
If the lender is unwilling to co-operate and correct the information, the last option is to contact the Ombudsman. The Financial Ombudsman Service are a free-to-use, independent service that helps settle disputes between consumers and financial businesses. They will be able to look at the mistake and your claim as to why it’s wrong to resolve the dispute. If the result goes in your favour, you can have the debt wiped, as well as records of the default from your report.
Pay your bills on time
This goes without saying, but always pay your bills on time. Whether that’s energy bills, mobile phone bills, or gym memberships, whatever it is, ensure that it is paid before the payment deadline passes. One late payment can derail your mortgage application as it will be on your credit report for the next six years. A straightforward way to avoid late payments is to set up a direct debit for all your bills.
If you know you have a bill coming up and you won’t be able to pay on time, contact the lender before the payment is due. They can offer help to resolve the issue, by setting up a payment scheme for example.
Register to vote on the electoral roll
When you register to vote with your local council, you are added to the electoral roll. Lenders use the electoral roll to confirm your identity. They will use it to verify whether you are who you claim to be, live where you claim you live, and check that your current address is an actual address, not a made-up one.
If you aren’t currently registered on the electoral roll, you can register on the government website within a few steps. Typically, it will take up to a month to be added to the electoral roll and will be updated on your credit report shortly after that. If you are registered on the electoral roll, but your credit report says otherwise, you can contact the credit reference agency to correct the matter.
Foreign nationals who are ineligible to vote can prove their identity in different ways. Different lenders prefer different identification methods, but you can add a note on your credit file explaining that you have identification documents available.
Manage your current credit
This applies to those who have overdrafts on their bank accounts and credit cards. Lenders will look at how much credit is available to you on your credit cards and overdrafts combined, and then compare this with how much you are actively using to determine your risk. What’s confusing is that you can be penalised for both – using too much of your available credit and too little. Therefore, you have to keep a healthy balance to avoid sending any red flags.
For instance, suppose you have £2,000 of combined credit available to you through your credit cards and overdrafts. If you only use £150 of this credit at a time, this can send a red flag to lenders as they may think you will suddenly use all of it in one go. On the flip side, if you use £1,500 of your available credit, this signals that you are pushing your finances to the limit. Therefore, this can give the impression that you’re financially struggling.
As a general rule of thumb, you should aim to use 25-35% of your available credit. This shows that you have stable credit relationships, using enough but not too much. At the very extreme, you can use up to 50% of your credit limit, but certainly not higher than that.
If you have lots of credit available to you and you aren’t using it, consider asking your lenders to reduce your credit limit. For example, if you have £10,000 available credit and you only use £1,000, ask your lender to reduce your credit limit to around £3,000.
Resist applying for credit just before a mortgage application
When you apply for credit, prospective lenders conduct a hard credit check on your credit file. This means they check your credit file in thorough detail to determine whether they will accept your credit application request or not. A hard credit check is registered on your credit report, regardless of whether you follow through with the application or not, and the more searches you have, the more it signals that you are desperately looking to borrow money – a red flag.
Therefore, leaving a six-month gap between your last credit application and your mortgage application is recommended. However, a three-month gap may also be acceptable. The longer the interval between applications is, the better your chances are of getting a mortgage.
Reduce your spending habits leading up to your application
When you apply for a mortgage, lenders sometimes ask for savings account statements, but almost always ask for three months of bank statements. This is for two main reasons: they want to check whether your income matches what’s on your payslips and to see what your spending habits are. If your bank statements show that you are spending large amounts of your paycheck each month, it will be seen negatively by the lender. That’s why it’s essential to avoid spending too much in the months leading up to your application so that when you provide them with your statements, it shows responsible spending habits. It will also have the added benefit of increasing your savings, which you can put towards your deposit.
Prepare the necessary paperwork beforehand
Along with three months of bank statements, three months payslips, and, potentially, savings account statements, prospective lenders will want to see various other documents. They can include any of the following:
- Three years of tax returns for those who are self-employed
- Most recent P60
- Proof of ID – e.g. a passport
- Proof of address – e.g. a recent energy bill
Typically, lenders want to see originals of all documents instead of copies. Arranging all of these documents can take time, so ensure you have these on hand before you apply for your mortgage.
Moreover, be careful when filling out paperwork from the lender. Ignoring little details and errors can result in you failing identity and verification checks. Not only do these delay the overall process, but it may mean that you have to start the application procedure again from the beginning.
Frequently Asked Questions
Can you get a mortgage with a bad credit score?
In theory, yes. Having a bad credit score doesn’t mean you can’t obtain a mortgage, but it does lower your chances significantly. The best course of action is to improve your credit score first, as this will improve the likelihood of your application being successful.
If my mortgage application is rejected, should I apply again immediately?
Repeated hard credit checks in a short period of time can harm your credit score and chances of obtaining a mortgage. So if your initial mortgage application is unsuccessful, refrain from trying to apply again immediately after. Instead, contact the lender and ask why your application was refused. If it was due to something related to your credit report, take the necessary actions to fix the issues before you apply again.
Can previous partners or flatmates influence my credit score?
For instance, suppose you took out a joint bank account or a loan with your then-partner or flatmate but have since separated or no longer live together. Write to credit agencies asking for a notice of ‘disassociation’ from them to ensure you are no longer linked. Their financial habits may involve late payments or defaults, which will reflect poorly on your credit file. Even if the person may have an excellent credit history now, that’s not to say that won’t change in the future. Therefore, it’s best to be disassociated with all other parties that can influence your credit score.