The Importance of Credit Scores in Mortgage Approval

The Importance of Credit Scores in Mortgage Approval

For the majority of people, a mortgage is the biggest loan they will ever take, and loan providers want to know that these huge sums of money will be paid back. Your creditworthiness is a highly important aspect of the approval process. The Openwork Partnership can help you with financial advice, or with general guides on managing ‘You and Your Money’

In this article, we will address questions such as "What credit score do you need for a mortgage?", and ‘‘why are credit scores so important?’’. We will also provide some top tips for improving your credit score. 

Understanding Credit Scores for Mortgages:

Credit scores are the most effective way for a lender to know if you are financially responsible and creditworthy. The higher your rating, the better your chances of getting a good mortgage deal. 

Credit scores are rated between 0-999 and the higher the number the better the score. Anything over 700 is a ‘Good - Excellent’ credit score. Credit scores are calculated from your credit history. They look at your ability to pay off debt, how stable your lifestyle is, and how long you have had your credit history. 

If your credit score is on the higher end, then chances are you will qualify for most mortgages and lower interest rates as the risk in lending to you is lower. This can lead to substantial savings during the loan’s term. On the other hand, lower credit ratings mean you are less likely to qualify for a mortgage, and if you do then you will receive higher interest rates, leading you to pay more overall for your house. 

You can build a good credit history through good long-term financial habits. Make sure to pay off any debts on time. Try not to move house very often, and make sure to check your credit report for any errors that could be affecting your rating. 

Why Credit Scores Matter in Mortgage Approval:

Credit scores are prioritised by lenders as they give a good and efficient overview of your credit history. This allows them to make a quick assessment of the credit risk in loaning money to you. 

You might still be able to get a mortgage with a lower credit score, but access to more preferential deals will be limited. 

Before you apply for a mortgage you should check your credit score, resolving any errors you find. You should also work out ways to mitigate potential future problems, such as a change in financial circumstances, or separation of assets.

You can use monthly budgeting tools to assess your financial situation and look at how a higher or lower interest rate on your mortgage will look for your payment plan. 

Tips for Improving Credit Scores for Better Mortgage Terms:

Improving your credit score takes time, so it might be best to think about applying for a mortgage at a later date once you have improved your rating sufficiently. 

Here are some of the best ways to improve your credit score: 

• Make sure you do not max out your credit cards, keep your spending low and pay the debt back regularly. 
• Make sure you are registered on the electoral roll, this showcases stability in your personal life. 
• If you have more than a couple of credit cards, then make moves to pay them off and close them. Keeping one or two credit cards is good, but more than that affects your ability to pay off debts. 
• For any debt you have, lay out a budgeting plan to pay it off in a timely and efficient manner. 
• Make sure you are using about 10% of your total available credit at any given time. Using more than 30% starts to look like you cannot curb your spending, whereas 10% shows a good level of control over your finances. 

These all form part of long-term good financial habits. If you continue to implement these behaviours even beyond your mortgage approval, then you might be able to arrange a better re-mortgage deal for yourself in the future. With a good financial history, you can open the door to better savings on your credit card, mortgage, or any other loan applications in the future. 

Common Misconceptions About Credit Scores and Mortgages:

In the UK, people often think you cannot get a mortgage without a good credit rating. However, some companies specialise in lending to people with lower credit scores. Interest rates will certainly be higher, but a lower rating does not exclude you from applying for a mortgage. 

Another common misconception is that by never borrowing money, such as using a credit card or taking out a small loan, you are likely to get better deals on your mortgage; the opposite is true. By never opening up a line of credit, you make it very difficult for lenders to assess your creditworthiness. You need to have a good credit history as opposed to no credit history at all. 

Concluding Thoughts on Credit Scores:

Credit scores are highly important when it comes to applying for a mortgage. They inform your chosen lender about your financial habits and your credit history. The higher your score, the better the deal offers you will receive. 

By taking action on your credit score sooner rather than later you will be able to set yourself up for a mortgage application when you are ready to take that step. You can use Experian to check your credit score for free. 

If you are at the beginning of your mortgage journey, then you might want to seek professional advice. The Openwork Partnership has hundreds of advisers across the UK who can advise you throughout your mortgage approval journey. The Openwork Partnership emphasises the importance of supporting clients through every step of the process. Click here to find an adviser near you. 

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE