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What is a bad credit score for a mortgage

25th September 2019

It’s very important to be aware of your credit score. It affects all aspects of your personal finance and a bad score can have very negative repercussions. You can check yours online for free through a number of different services (such as Experian), so there’s no excuse not to be aware of yours.

One of the aspects of your personal finance directly affected by your credit score is your mortgage. Without a good credit score, getting a mortgage can be very difficult, but it’s not impossible. In this article, the IMC team look into what constitutes a bad credit score when you’re looking for a mortgage, along with what you can do to improve yours.

 

Your credit score

Credit scores are designed to make it instantly clear to lenders which applicants are lower risk, making it easier to approve people for loans. Also referred to as credit reports, lenders use them to determine whether you can qualify for the loan that they’re offering. Having a high credit score demonstrates that you’re able to manage your finances, thus making you a far more attractive customer.

Your credit score is determined through a number of factors that make up your credit history. 

It will be impacted by a variety of factors that you should be aware of. According to Experian, some of the most important factors are:

  • Your payment history – This is the most important factor, and just one missed loan repayment can have a dramatically negative effect on your score. Every lender wants to be confident that their customers will be able to pay back their loans in full and on time.
  • Credit utilisation – This metric demonstrates to lenders how much of your current available credit you’ve been using. If you’re utilising more than 30% of whatever loans you have currently taken out, your credit score is likely to be negatively affected.
  • Hard inquiries  – A hard inquiry is added to your credit report every time a lender requests your report to help them decide whether to offer you a loan. Hard inquiries remain on your report for up to two years and have the potential to leave a negative impact.
  • Negative information – Negative information includes late or missed payments, foreclosures, collection accounts and charge-offs. Negative information indicates that you have defaulted on a loan and can definitely put lenders off. These can stay on your credit file for up to seven years, so should definitely be avoided.

 

Credit score and buying a home

It’s very likely that your mortgage will be the largest loan you ever take out. Therefore, mortgage lenders – understandably – expect applicants to have strong credit reports before approving them. You’ll want your credit score to be as high as possible before applying for a home loan so that you’ll be approved first time and avoid any hard inquiries showing up on your report, but how can you do this?

The first thing you should do is make some soft inquiries with the three main credit score agencies: Equifax, Experian and Callcredit. There’s no universal credit score, so check with the three to get the most accurate score possible. These soft inquiries won’t have any impact on your score, so there’s no harm in checking with them as many times as you need to.

Once you know how you perform in terms of credit score, you may want to run through it with an independent mortgage advisor. A qualified advisor can tell you whether or not your score is strong enough for you to be approved for a home loan and what you can do to improve it, if necessary.

If your advisor determines that you have a good enough credit score to buy a home, congratulations! You can then begin the mortgage application process and take that first step on the property ladder. Unfortunately, it’s not always that simple. If you find yourself with a less than positive credit score, you can action their advice on ways to improve it.

 

What to do if you have a bad credit score

If you’ve found yourself with a bad credit score that would prevent you from acquiring a mortgage, the easiest way to improve it is to start managing your money more responsibly. Using a credit card regularly is perhaps the most simple method to improve your credit score. Use your credit card frequently, while always paying it off at the end of the month to show lenders that you’re a trustworthy customer who’s able to repay any money borrowed on time.

However, it’s important not to use your credit card too frequently leaving you unable to pay it off. Avoid being frequently reliant on loans and aim to pay off your credit card debt as quickly and as regularly as you can. Being heavily reliant on loans is another part of your credit report that will be flagged to potential lenders as a negative aspect.

 

When applying for a mortgage, it is always beneficial to seek out the advice of an independent financial advisor. The IMC team can help you find a mortgage that’s right for you, and help you work towards attaining a positive credit score. Contact us today.

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