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In this article we’ll look at mortgage credit reports, the various checks carried out by lenders, and answer some of the common questions that come up around credit checks when you’re getting a mortgage. By the time you’ve finished reading, you should feel more comfortable with the terminology and have a better idea of what to expect when you buy a house.
When you apply for a mortgage you’ll be subject to a whole series of checks and a lot of scrutiny from your lender - it’s a big decision for them as well as for you and they’ll want to feel confident in your ability to repay the loan responsibly.
These mortgages checks will require documentation to evidence them, for example a passport and recent bills to prove your identity and address and payslips to show your income. It helps if you can get this paperworkorganised ahead of your application so that it can proceed quickly and smoothly without too much back and forth. If you’re not sure what evidence you’ll need to provide then your mortgage broker can advise.
These checks will include:
Yes, any potential mortgage lender will want to look at your credit report to get an idea of your creditworthiness. They won’t be looking at the credit score that you see if you check your own report, they’ll be looking at the details of exactly what credit accounts you have already, how well you manage them, and any previous credit issues.
A credit check is important for lenders because it’s one of the ways they assess risk. Handing over a large sum of money in the form of a mortgage always comes with some risk attached, but lenders want to know that the risk to them from lending to you is low and that you are likely to make your repayments in full and on time.
A mortgage lender may well do more than one credit check in the course of your application. They will do some form of a check in the initial stage to approve your agreement in principle, a more in-depth check for your full application and possibly a further credit check before completion to make sure that nothing significant has changed since your original mortgage offer.
Yes definitely, knowledge is power remember! Checking your credit records is one of the first things you should do before you apply for a mortgage and if you’re working with a broker, which is always a good idea, they will want to see your reports too.
There are three primary credit reference agencies (CRAs) in the UK - Equifax, Experian and TransUnion. You can get a copy of your credit report from any one of them, although each will hold slightly different details. Ideally you’ll get reports from all three or use a service like checkmyfile that compiles results from all of them, plus Crediva. We also offer a free credit report service, so get in touch if you’d like more information about that.
Once you have your reports, you’ll want to check that they are accurate.
It would be a huge blow to be turned down for a mortgage based on a mistake, and having a mortgage application declined could harm your chances of making a successful application the second time around because of the impact on your credit report.
Next, go through the details to see where any issues might be. Each credit account will have monthly repayments reported, so this will highlight any missed or late payments, and the court information section will show any more serious credit issues such as bankruptcies, insolvencies or county court judgements (CCJs). While it is still possible to get a mortgage with a low credit score, it’s more difficult and you may have to go to a specialist lender. Having that clear picture as a starting point is important, as it will impact which lenders you apply to.
That depends on whether you’re applying together or not. If you’re looking for a joint mortgage then yes, both parties will be credit checked and any bad credit issues that come up will impact the application. It’s not the case that one partner with good credit cancels out another with bad credit - if anything it’s the other way around.
If you’re applying as a single applicant though, your partner won’t come into the equation - they won’t need a credit check just because you happen to be in a relationship with them. If you are married or in a civil partnership however then you may find it more difficult to find a lender who is prepared to consider an application from you as a single person - most prefer married couples to apply jointly.
Before you find a house you want to buy and make an offer on, you’ll want to get an agreement in principle. This is not a guaranteed mortgage offer, but it is a statement from a lender that they agree, in theory, that they are likely to give you a mortgage of a stated amount. This agreement in principle gives the vendor and estate agent confidence that you are in a good position to make an offer.
At this point, the lender will have performed some basic checks, including a credit check, to confirm details of your identity and income. The credit check that is done for an agreement in principle can be a soft check or a hard check, depending on the lender. This is an important distinction, so don’t be afraid to ask the lender what kind of credit check they plan to do if you’re not sure.
A soft check or soft search doesn’t leave a mark on your credit file for other lenders to see, so ideally this is what you’d want a lender to be doing at this early stage. A hard search however does leave a footprint. Having one hard search on your credit report probably won’t harm your credit score on its own, but several hard searches in a short period of time can be a red flag for lenders, so it’s important to keep track of them and keep them to a minimum where possible.
Your income comes into play as part of a mortgage lender’s affordability assessments. In the UK, mortgage affordability is calculated primarily based on a multiple of your annual income. Other factors may come into play, but typically the income multiple is a cap in terms of how much a lender is willing to lend.
For most mortgages this multiple is somewhere between 4 and 4.5 times your annual income, so if your salary is £40,000, you’d be able to borrow somewhere between £160,000 and £180,000. If you are applying with a partner for a joint mortgage, then it would be a multiple of your combined salary.
There are some situations where you might be able to get a higher income multiple, for example if you work in certain professions, including teachers, nurses, doctors and solicitors. These are sometimes called professional mortgages, although they are essentially just standard mortgages with preferential terms for some occupations. Other lenders may be open to higher income multiples if you can offer a larger deposit or have other mitigating circumstances.
Yes, it’s not simply a case of looking at your salary and deciding how much you can afford to borrow, lenders will also check your existing credit commitments to see how much you have left over after meeting these. The amount of debt you have as a percentage of your income is known as your debt-to-income ratio. If for example you have £3,000 coming in every month, and loan and credit card repayments totalling £600, this would give you a debt-to-income ratio of 20%.
Lenders prefer your debt-to-income ratio to be as low as possible. It’s all very well having a high income, but if your £3,000 a month salary has to cover £2,000 of existing loan and card repayments then it’s unlikely that you’d be able to secure a mortgage.
Yes, as long as you can evidence your earnings and you earn enough to afford the mortgage you need, then being self-employed doesn’t mean that you won’t be able to get on the property ladder. Lenders prefer to see three years’ worth of proof of earnings, normally in the form of accounts or self-assessment statements - your SA302 tax calculation. They will then use your earnings after expenses but before tax to calculate how much you can afford to borrow.
If you don’t have three years of records then don’t worry, some lenders will be prepared to accept you for a mortgage if you’ve only been self-employed for a short amount of time. It helps in these cases if you’ve had previous experience in the industry you’re now working in, or have contracts in place that show future income. Talk to us about your situation and we will do our best to find you a mortgage that fits your needs.
Yes, you might be able to. It’s impossible to give any guarantees because so much depends on the nature of your credit issues and other factors such as your income and employment, but having bad credit certainly isn't a deal breaker. We’ve secured plenty of mortgages for people who have defaults, missed or late payments or CCJs on their credit records, it’s just a case of being fully aware of any issues in advance and approaching the right specialist lenders.
It’s worth keeping in mind that bad credit mortgage rates are normally higher than for standard mortgages, and you may find potentially stricter terms and higher deposit requirements. Lenders put these measures in place to mitigate the risk that comes with lending to someone with a history of defaulting on loans, and this will unfortunately mean that your mortgage is going to be more expensive, at least initially. If you manage your repayments responsibly though, this can have a positive impact on your credit score. It may mean that after your initial mortgage period, you can remortgage on a better deal and bring those repayments down.
You should now have a clear understanding of the mortgage application process and the various checks that lenders will carry out when assessing your application. If you’d like any support applying for a mortgage then get in touch with us here at MortgageKey and we can help.
We can advise on all types of mortgages, from buy-to-let mortgages to adverse credit mortgages, and we are completely independent, so you’ll know that we’re recommending the right deals for you. There’s nothing to pay until completion, so what are you waiting for?
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