If you are looking to get a mortgage, you need to have a good credit score to get it at affordable interest rates. Another benefit of having a stellar credit rating is that you can escape putting down a larger deposit.
Unfortunately, only some are lucky enough to have a perfect credit rating. If you are one of them, you will likely be tempted to do up your credit report as quickly as possible. Is this all you need to qualify for a mortgage, or are you missing something very important?
You have got tunnel vision if you just emphasise your credit score. If it is good, you can quickly get the nod.
You will be surprised to know that you may be refused a mortgage despite a perfect credit report, and you can get a mortgage at OK interest rates despite a less-than-perfect credit rating.
Does that mean your credit score does not matter at all? Well, it still does matter, but a lending decision is made based on your credit history.
Three things that a lender must check
When you put in for a mortgage application, a lender will look at the following three fundamentals:
- Do you have a large enough deposit?
- Can you actually afford to pay off the mortgage?
- How smartly have you handled your previous debts?
Your credit score cannot solely add up to the lending decision. Though you have a poor credit score, you still have a chance to get the nod if you have arranged a large deposit.
Get details from all credit bureaus
There are typically three types of credit reference agencies. You never know which lender will turn to get your credit report. Therefore, it is crucial that you get it from all agencies. Your credit score may likely vary by credit reference agencies.
It makes sense to do it at least six months before because you have some time to fix errors if you find them.
When will your credit score be clean?
If you have a bad credit rating, you have some ways to improve it, but it will take time. The default debts will be removed from your credit file after six years, whether you settle them or not.
Even if the defaults are added each month, the period of six years will be calculated from the first-time default report. If you have any debts marked under “arrangement to pay,” the default will drop off after six years from the date of settlement.
Likewise, the CCJs and insolvencies drop off after six years.
Will paying off the defaulted debts improve your credit score faster?
Although it makes sense to pay off defaulted debts and debts with an arrangement to pay, you will need more than that to improve your credit score. However, it does not mean that you should rebuff them.
Before you apply for a mortgage, you should try to have settled all of your outstanding debts. Most lenders do not have a problem lending money despite the issues as long as they have been resolved.
There are few chances that you will get approval for a mortgage at OK interest rates despite a poor credit file provided:
You paid all outstanding or pending debts at least a year ago.
Or all the defaults are more than three-years-old.
However, now mortgage lenders have become stricter with their approval policy. Even if you meet the above condition, you can only be allowed to get a mortgage if your deposit size is up to 20%.
If your deposit size is at most 10% or 15%, a lender would want defaults to date back to over six years ago. It means you may have to wait until all defaults disappear from your credit report.
You cannot escape even if debts have fallen off your credit report
Even if the defaults have dropped off your credit report, you are to repay them. However, this rule makes an exception when your old debt is not enforceable due to any reason. When you make a default on a debt, lenders do not usually sit on their hands.
They will start chasing you through emails, messages, notifications, and calls. They will keep asking you to make payments. They will transfer you to a debt collection agency if you do not turn to their requests or messages.
Note that a lender will inform you before doing so. A debt collection agency will look over your financial condition to decide the size of your monthly payments. You are supposed to stick to the payment method.
If you find that your financial situation has further degraded, you may file for insolvency. This is the only way you can escape defaults. However, note that insolvencies will show up on your credit file for six years.
Mainstream lenders do not feel free to lend money if it shows up on your credit file at the time of applying for a mortgage.
Ways to protect your credit score
Here are the ways to protect your credit score if you do not want to face delays in content writing:
Check your credit report to see if there are no errors related to unknown defaults, inaccurate contact details, etc.
If you have already had some defaults, try to pay them off. Then, start stashing away for a deposit.
Make sure you have not been taken on a new loan for at least a year. In case you have to meet emergencies, small loans like loans in 15 minutes with no credit check would be a suitable option.
The credit utilisation ratio should not be more than 25%. Lesser is better.
The final word
There is no magic bullet to make your credit report perfect for a mortgage. You will have to ensure that all outstanding debts have been paid off. At the time of applying for a mortgage, you should avoid having any debts. Arrange a bigger deposit size if your credit score needs to be better.
