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Low credit score mortgages
Credit scoring is a complicated subject with two different types of score involved.
The first is your individual credit score given to you by the credit reference agencies such as Experian, Equifax and Transunion.
The second is the credit scoring system that lenders use when they are assessing your agreement in principle or full application.
For individuals, the score given to you by the credit reference agency is based on how you have handled your credit commitments over recent time, such as six years.
It shows your credit conduct mainly, how you have been handling your accounts for utilities, mortgages, credit cards, store cards, loans, hire purchases and more.
These show whether the accounts have been paid on time each month or not.
If they haven’t, there could be adverse credit on the file such as missed payments, arrears, defaults, arrangements, county court judgements or more.
Adverse credit would likely result in a lower credit score, which could have a negative impact on your mortgage.
When lenders are credit scoring, it is a computer with a set algorithm that looks at your full situation to assess whether they would be willing to offer you a mortgage.
This is usually at the stage before a human takes over to underwrite the mortgage.
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What credit score do I need to get a mortgage?
There is usually no set score on a person’s credit file that an applicant needs to have, to qualify for a mortgage.
However, your credit score showing on the credit files issued by the reference agencies, is often a reflection of how you have handled credit accounts in the past.
For instance, if your credit score is lower due to having multiple defaults on the file, you would need a lender that can accept them.
They would be looking at how much they were for, who the creditor was, when they were registered, and when they were settled. This is the same for any other type of adverse credit.
Lenders all have their own criteria around bad credit, so the events on your credit file would need to be acceptable to the lender.
This may depend on the level of equity within your property.
In this scenario, you should look for a mortgage adviser with experience in adverse credit, so they can look at your options.
They would want a copy of your credit file to be able to look for a lender accordingly.
Check My File offer a free one-month trial and show data from three major credit reference agencies.
A credit report from this website is a useful resource for a mortgage broker to do their research for you.
Read more: What Credit Score Do I Need To Get A Mortgage?
How do lender’s credit scores work?
Lender’s credit scoring systems work in a completely different way.
Rather than report your conduct with creditors, they are using a point system to assess your full situation to see if it fits within their lending policy.
Lenders do not usually disclose how the algorithm in their system works, as it is used to filter applications prior to an underwriter looking at them.
Lenders need to know whether you are a first time buyer or moving, employed or self-employed, your income levels, amount of your deposit, debt levels and any adverse credit.
Most lender’s systems allocate you with points based on your situation, known as credit score.
They will also be looking at your credit file, to see whether your case meets their appetite for lending.
If the lender system declines your application based on credit scoring, some lenders will be willing to look at it manually to see if it is a case that they can consider.
A mortgage adviser will be able to give you a clearer idea of how lender credit scoring works.
How can I improve my credit score?
There are sometimes things that you can do to improve your credit score over time.
For instance, making sure that you are on the electoral roll is important so lenders can match you to your correct address.
Staying comfortably within your credit facilities can also help you.
For example, if you had 2 credit cards with a £5,000 facility on each, with a £4,750 balance on each, this could be seen as negative as you are at 95% of your facility.
It would not always have an impact but it can suggest that you use the credit facilities to the maximum.
Paying these down could improve your credit score over time.
If you have any old defaults or county court judgements that have not been settled, paying back these creditors may also improve your credit score.
It will not guarantee that you get a mortgage as a result of doing it, but it certainly looks better than leaving them unpaid.
The most important thing you can do is make sure that you pay all of your creditors on time.
If an institution is considering lending you their money, they want to see how you have handled your debts in the past.
Paying your commitments on time is important to show the lender that you can handle your finances.
Does a low credit score mean I have bad credit?
A low credit score on a credit report does not always mean that you have bad credit.
However, often it is a reflection of how the accounts have been handled.
For instance, if you have county court judgements, arrears and defaults resulting in a low credit score, this reflects the debts were unpaid.
There are also occasions where a person’s credit score appears low but there have been no adverse events.
This may be down to having no past credit or an inconsistent reading.
Although this may affect you with some mortgage providers, there would usually be options available if you are not showing adverse credit.
Adverse credit does not always stop mortgage applications, but it is a good idea to find a mortgage adviser with experience in bad credit mortgages.
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Can all lenders offer low credit score mortgages?
Not all lenders will offer you a mortgage if your credit score is low.
Many rely on their computers to make an initial decision at agreement in principle stage before an underwriter assesses the case, at full application stage.
There are however mortgage lenders that can consider applicants if their score is low, due to experience in handling credit, or adverse credit.
If you have adverse credit, it may mean that you need to pay more for the product due to it being of a specialist nature.
You may not necessarily need a specialist lender, depending on what the adverse events were, and whether you fit the criteria of a high street lender.
This is where a competent mortgage broker should be able to help you.
Should I use a mortgage broker if I have a low credit score?
Mortgages can be a minefield, if low credit scores or adverse credit is present, they become even more complex.
If you have a low credit score, it may be that you do not meet the criteria of your bank, but are acceptable to another lender.
It can take time to arrange appointments with lenders directly so going from bank to bank may not be the best use of your time.
There are mortgage brokers that have vast amounts of experience in arranging mortgages for people with adverse credit on their files.
They will be able to get a full overview of what the adverse credit consisted of, by viewing your credit file.
When they know more about this, and your full situation in general, they can look for a mortgage lender accordingly.
Most mortgage advisers are willing to offer a free consultation to explain your options.
Conclusion
Personal credit score and lender credit scoring are two separate things.
Personal credit score is an overview of how you have handled your financial commitments over the past 6 years.
Lender’s credit scoring systems look at the full details of an application, including your credit file, to assess whether it meets their own lending appetite.
A low credit score on your credit file does not always mean that there are adverse events, but could still impact your mortgage application.
It would be recommended to look for an experienced mortgage adviser who can assess your credit report and tell you what your options are.
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They are experienced, which can boost your chances of being approved.
