Financial transactions involving credit almost always require the borrower to pass a credit check - and property purchases are no different. Whilst credit checks and scores may not be the most exciting part of buying a home, they are a necessary hurdle that must be considered as soon as you have decided whether or not house prices in the UK are within your grasp.
What is a credit check?
A credit check is a way for lenders to assess the financial risk of lending money to a particular individual. Each credit check results in a credit score. Credit scores are determined by one of three UK credit reference agencies: Callcredit, Equifax and Experian. Different lenders may use different agencies, and each agency will give an individual a different score. Callcredit scores are out of 710, Equifax scores are out of 700, and Experian scores are out of 999.
How do you "pass" a credit check?
Passing a credit check is a somewhat nebulous concept. It is not an exam or test, and there is no pass or fail. Different lenders have different thresholds relating to their own appetites for risk. Moreover, the thresholds themselves may vary depending on the borrower's own risk profile. For example, someone with a secure or high income may be more likely to be accepted, regardless of their credit score, than someone with the same score but an uncertain or lower income.
What credit score do you need to buy a house?
Although there is no set figure, you should expect to need a score that is inversely proportional to your deposit in order for a lender to agree to offer you a mortgage. As a general rule, an excellent score with Equifax is above 475. With Experian, a score of 700 or above is usually considered good, while over 800 is excellent. Callcredit uses a slightly different method and turns a credit score into a rating out of five, with five being the highest score. Many lenders regard a score of three as neither good nor bad, and may reject a mortgage application from someone with this rating.
How to improve your credit score
Ideally, you should consider your credit score long before you first start scanning property particulars or weighing up house prices in the UK. As a general rule, credit checks will bring up financial information from the last six years. Obviously, it is unusual to plan a property purchase so far in advance, but checking your credit score annually is a good practice to adopt. As well as enabling you to keep an eye on your score and assess for yourself your likelihood of being awarded credit, it is also an excellent way of safeguarding against identity fraud.
When you receive your credit report, you should check it for anomalies, inconsistencies and inaccuracies. Typical errors include incorrect addresses. You may also see evidence that your financial profile is still linked to someone with whom you no longer have any financial relationship, such as a divorced spouse. It is possible to apply to correct this. You should also examine the report carefully to check that any credit applications listed on it are applications that you made yourself. Sadly, it is not uncommon for fraudsters to apply successfully in another individual's name.
Your credit report will detail any missed or late payments. As these may also be reflected in your overall credit score, it is best to ensure you always make payments on time. If you anticipate a problem, contact the lender before the payment is due. It is sometimes possible to renegotiate payment terms or arrange a payment holiday. Organisations such as Citizens Advice and StepChange may also be able to offer free and useful advice to anyone whose financial situation is worrying them.
As well as missed or late payments and incorrect information, some would-be mortgage applicants run into problems due to their lack of a credit history. If you have never had a credit card, bank loan, hire purchase agreement or mobile phone contract, your credit history may be fairly blank. Although, on the face of it, this seems like it ought not to present a problem, it makes it difficult for lenders to assess your risk profile accurately. This may result in a mortgage application being rejected. If possible, plan ahead and build yourself a positive credit history. One of the easiest and most popular ways to do this is to apply for a credit card, use it judiciously and pay it off in full each month.
Finally, remember that a lower than hoped for credit score does not always translate automatically into a credit refusal. Most lenders also take other factors into account. These might include your financial history with that particular lender, your income (both its size and its stability), and the size of your deposit (those in excess of 10 per cent of the property's value are likely to be viewed most favourably). There are also lenders that specialise in lending to individuals with less perfect credit ratings, and it may be worth seeking them out before giving up on the idea of purchasing a property altogether.
If you are fortunate enough to have an excellent credit score, look after it. This means not applying for unnecessary credit, making repayments on time, not maxing out your credit card and being wary of linking your finances with anyone whose record might not be as spotless as your own.
How to prepare for a property purchase
It is worth checking all three of the main credit reference agencies, as you will not know which of them your lender may prefer. Unless you are deliberately building a credit profile for yourself, you should avoid applying for credit in the six months or so prior to a mortgage application. Equally, in order to give yourself the best chance of having your mortgage application accepted, rein in your monthly spending for six months prior to applying. This is because the lending institution will scrutinise your income and expenditure to stress test your application and ensure you can afford your monthly repayments.
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