How is your credit score calculated?
It is calculated using the different types of data from your credit report : Minimum Credit Scores There is no official minimum credit score since lenders can (and do) take other factors into consideration when determining if you qualify for a mortgage. This posts look at What Credit Score For A Mortgage Is Needed in more details.
Other factors include type of job you have, how long you have been in your job. What amount of deposit you have. In some cases even the address you live at and how long you have been at the address can affect the decision.
There are things you can do in preparation but of course, it doesn’t always work out that way, but if you have the time to do things like check your credit report (and fix any mistakes) and pay down debt before applying for a mortgage, it will likely to make getting a mortgage easier.
Can you still get a mortgage with a bad credit score or no credit history?
As a general rule, the smaller the mortgage deposit you have to put down, the better your credit score will need to be for lenders to accept your mortgage application. But if you have a large deposit and enough income you can still get a mortgage even if you have an adverse credit history. Some lenders will ignore defaults, late payments and CCJs. Some lenders need the arrears to be settled whilst others will ignore them if they are perhaps over 2 years old or 3 years.
What Credit Score For A Mortgage Is Needed?
What is a good credit score to get a mortgage?
- Experian rate peoples credit score from 0 to 999.
- Equifax rate people’s credit score from 0 to 700. They rate scores between 280-379 poor, 380-419 fair, 420-465 good and 466 to 700 excellent.
- Transunion (previously called CallCredit) has score ranging from 0 to 710.
Credit score is just one factor taken in to account when applying for a mortgage. Credit score numbers also vary depending on which credit reference agency you are looking at.
There is no minimum as such and to be honest the score should be taken with a pinch of salt. The main factors to look at that will determine whether or not a lender will agree a mortgage for you are detailed below:
- Payday loans – If you have recent payday loans taken withing the last 12 months then it is highly unlikely that you will have a good enough credit score to get a mortgage. From the lenders point of view if you have taken a payday loan then you are already struggling to afford your existing commitments. However there is always an exception to the rule and there is still some lenders that would consider giving a mortgage with a recent payday loan. Generally they will ask for a good reason as yo why the payday loan was taken.
- Late payments (unsecured credit) – If you have made late payments on loans or credit cards then this can cause issues with getting a mortgage agreed. High street lenders that offer the cheapest rates will usually require that any applicant has not been more than 2 payments behind on any one credit agreement within the last 2 years. They will also usually require that all accounts are now showing as caught up and no arrears at all at the time of decision in principle for the mortgage.
- Late payments (secured credit) – Again high street lenders do not like any late payments at all within the last 2 years. It might be possible to get a mortgage agreed is the mortgage or secured loan has just been 1 payment behind known as a status 1 on the credit file. If a direct debit bounces then it will likely shows as a late payment on the credit reference agencies report.
- Usage of Credit Cards Percentage – If you have a credit card then typically if the balance is using 90% of the credit limited then this could lower your credit score and decrease the chances of getting a mortgage agreed. However unlike adverse credit issues such as the ones explained below the impact of your credit score is not as severe and getting a mortgage with high balances and high credit limit usage is still possible.
- Defaults – A default occurs on the credit report when an account such as a mobile phone, credit card or loan falls in to arrears. The lender writes the debt off and often passes the debt to a debt collection agency. Getting a mortgage with a default is still possible but will need a bigger deposit. It will also depend on the size of the default or defaults how old it is and when it was registered.
- Count Court Judgements (CCJs) – CCJs and defaults carry a similar weighting when looking at your credit score for a mortgage. Again it will depend how old these are the size of these CCJs, whether they are settles or not and what deposit you have.
- IVA’s – Individual Voluntary Arrangement (IVAs) this is when you have an agreement with your creditors to pay all or part of your debts. You agree to make regular payments to an insolvency practitioner, who will divide this money between your creditors. This is very similar to bankruptcy as per below. Typically these stay on the credit file for reporting purposes for 6 years from the date you enter in to the IVA. Some lenders will ignore the IVA if it was registered over 3 or 4 years ago. But it will also depend on when the IVA was settled and also what affect the IVA had on other accounts in your credit file. For example credit cards, loans etc that you have when entering an IVA will usually show as defaults on the credit file.
- Bankruptcy – This is a legal status that usually lasts for a year and can be a way to clear debts you can’t pay. Like IVAs above they stay in the credit file for 6 years from the date you went bankrupt. Some lenders will lend if the bankruptcy is over 3 or 4 years but typically most lender will need the date to be over 6 years. Again like IVAs when an applicant goes bankrupt it will have a massive affect on their overall credit file and usually many defaults and or CCJs will show on the credit file too.
- Debt Management Plans – This is when you deal with a third party company and they make arrangements with your loans or credit cards to pay them back with a smaller payment that was on the original credit agreement. Mortgages can still be agreed but you will be looking at higher rate non high street lenders. The lender will usually also ask for the last 12 months statement from the debt management company to show payment history is satisfactory.
Next steps – Getting a mortgage agreed with credit scoring issues.
Firstly I would suggest you get copies of the credit files for all the applicants.
Then the best thing to do is speak to a broker as they know the market and deal with cases that need expert help on a regular basis. A broker is the best person to deal with to help you with a mortgage application where credit report information is not perfect due to credit reference scores being low.