How to get a Mortgage – Part one: Credit

It is possible to get a mortgage – Let me tell you how

Ash Shah, Crystal Financial Solutions

One question I am always asked is, “Is it still possible to get a mortgage?” There seems to be a common myth that it is virtually impossible to get a mortgage to buy a property, whether it is for residential, commercial or investment purposes.

I am pleased so say absolutely YES..…it is still possible to get a mortgage. Lenders are still lending, however the lending landscape has changed dramatically and it affects all of us and we need to understand how best to position ourselves to get a mortgage.

Before 2007, if you had a pulse, it was possible to get a mortgage, even if your circumstances were very restrictive. Mortgage lenders had a very large appetite to lend against property. However the Credit Crunch fuelled by the collapse of various banks, mortgages backed securities going to the wall and the sharp decline in property prices mainly in the U.S. has soon reduced this appetite.

Traditional lending where a potential borrower would meet with their bank manager, who then would decide how much could be borrowed based on personally knowing the borrower and their personal circumstances soon diminished in the late nineties and early 2000 with the wrath of various different lending schemes created to fuel the appetite for consumers desire to purchase property together with the advancement in technology. Buy To let mortgages, self certification mortgages, 125% mortgages, mortgages to those who had adverse credit and so on are examples of vehicles created to allow property purchase, many of which now no longer exist due to tighter control on lending, fewer lenders
in the market, less money to lend and most importantly reducing lending risk.

As the personal contact with the bank manager is virtually nonexistent now and lending is now done mainly via Independent Mortgage Brokers or directly with a lender, a mortgage borrower needs to understand what mortgage lenders are looking for in order to lend. In simple terms a mortgage lender wants to ensure that when they lend money, they get it back and on time. They would want to ensure that the mortgage borrower:

• Has the willingness to pay the mortgage back
• Has a track record of paying back debt
• Can afford to pay the mortgage back

The below explains how mortgage lenders satisfy the first two points above (The last point will be covered at a later date).

One of the main tools lenders will use is Credit Files. This will enable a lender to carry out a “Credit Check” to ensure the potential borrower has “Clean Credit” and “Credit Scores” well.

Active and /or historic credit can help you get a mortgage

There are 3 main credit reference agencies in the UK.

• Experian
• Equifax
• Call Credit.

All lenders use at least one of these. The purpose of Credit reference agencies is to collect data supplied to them by lending institutions in connection with a particular individual and their borrowing habits. This data is then compiled into a credit file. When one borrows money, whether it is the form of a credit card, a loan, a mobile phone contract, interest free credit, a mortgage and so on, the amount borrowed, the monthly payments, how much is outstanding, how long is left before the contract ends, if payments are made on time etc are all recorded on the credit file. This snap shot will provide current and historical
information (a credit file will hold data for the last 6 years) of an individuals borrowing habits and most importantly their willingness and ability to service debt, on time.

As long as debt has been serviced on time, the credit file will deemed “Clean” or commonly known as “Clean Credit”. If there has been late payments, defaults, county court judgments’ and bankruptcies, these will also be recorded on the credit file (and stay on there for 6 years!) and result in the individual not having clean credit. By not having clean credit, the ability to get a mortgage is reduced substantially or even may not be possible. I cannot stress how important it is to have Clean Credit in the current lending landscape. Even one late credit card payment may result in a decline in lending by some mortgage lenders.

By having a high “Credit Score”, the ability to get a mortgage will increase substantially as the mortgage lender will see the potential borrower as a lower risk than to those who have a low credit Score. Most lenders in the UK require their potential clients to pass a credit score. Lenders allocate points to various aspects of an individual credit profile and circumstances.

High Credit Score will make lenders lean to a more favourable decision

Someone will typically score high if:

• they are on the electoral role,
• has been at their residential address for a number of years,
• has had historic debt which has been paid on time and paid off
•  as well as having some current debt which is being paid on time.

Someone will score low if:

• they are not on the votes role,
• has many addresses over the last 3 years,
• has late or missed payments on debt historically and current
• has a large amount of debt in the background.

Each lender will set their own minimum pass credit score dependent upon the type of clients they want, the mortgage requested and the amount of business they want. The 3 credit reference agencies also provide their own credit scores which can help one understand how likely one is to obtain credit.

By understanding credit files and credit scoring you can best position yourself to pass the first hurdle to get a mortgage. Make sure your credit file is accurate and if errors exist, get them corrected. In my next article I will explain the other aspects of how lenders assess if they will lend.

Crystal Financial Solutions