IF YOU ARE PLANNING to buy your first property, one of the initial steps is to apply for a mortgage. This process requires an assessment of your creditworthiness by lenders. When they carry out their assessment, it will include an evaluation of your credit report which details all the information on how you have managed credit in the past, including late or missed repayments.
The sooner you can start managing your finances well, checking whether there are any negative items on your credit file that should be removed and working on making sure that it shows positive activities, the better chance you give yourself of securing a more competitive deal from mortgage lenders when looking into a property purchase. This is called being mortgage ready.
Tips to improve your credit rating when applying for a mortgage:
GET A COPY OF YOUR CREDIT REPORT
Your credit history is a continually updated summary of your credit based activities. It will include how much you have borrowed from each provider, along with any late payments or credit defaults.
By requesting a copy of your credit report you can check that everything is accurate and as it should be.
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HAVE SOME BILLS IN YOUR NAME
Utility bills, such as your electricity or gas, count as a form of credit. If you pay them on time, they’re a good way to show lenders you can pay your bills back reliably. If you don’t have an account in your name, it might be worth considering putting one or two utility bills in your name.
CARD AND BILL PAYMENTS
If you already have a significant amount of credit available, for example, if you have multiple credit cards or a large overdraft, lenders may view this as a negative. It’s also important to remember, though, that what you owe should not make up a high proportion of your overall limit. It may be wise to balance paying off debts with closing old accounts.
CREDIT CARD USAGE
If you haven’t borrowed money before, it’s difficult for a mortgage lender to judge how likely you are to meet your future repayments.
Your credit file could be almost non-existent and this may impact your credit score. You can grow your score by using credit regularly and responsibly. Spending small amounts and paying your bill off each month shows lenders they can trust you to repay what you borrow.
An arranged overdraft, or a credit building credit card with a low limit, may be easier to get accepted for than a credit card or personal loan.
BE AWARE THAT CHECKS TAKE POINTS
Every time you apply for credit, for example a credit card, loan or new utility bills, your rating will be affected when a hard search is carried out on your accounts. Therefore, be conscious of how many you are doing. Don’t apply for credit too frequently in a short space of time as this may also make lenders feel that you’re overly reliant on credit and are high risk for them.
SAVE FOR THOSE BIG PURCHASES
When it comes to large purchases, instead of just sticking unusual, large amounts on your credit card or missing your credit card bills to afford them, think ahead and save regularly in a savings account for rainy days for big purchases such as new furniture for your new home. This way, the purchases can occur without affecting your credit rating.
REGISTER ON THE ELECTORAL ROLL
Ensure you’re on the electoral register as lenders will use this to check your name, address and where you’ve lived before. Lenders need to confirm these details to validate who you are before they offer you a mortgage. So, if you’re not registered, it could cause a delay or result in your application being declined.
KEEP YOUR ADDRESS UP TO DATE
When you move home, credit rating agencies may not be able to locate you immediately and therefore your score can drop. Registering to vote is a good way to get your new address to sync with credit rating agencies. The longer you’re at an address, the steadier your credit score will grow, so try not to move too frequently otherwise your credit score could show uncertainty.
GET YOUR JOINT ACCOUNTS IN CHECK
If you have an account that is linked to another person, such as a spouse, friend or family member, actions in a joint account will still affect your credit score so it’s important to keep an eye and a handle on these too. In the run up to your property purchase, it’s important they act responsibly in your joint accounts to keep your credit score as healthy as possible.
CHECK FOR FRAUD
Although rare, if you notice odd credit checks or any activity that doesn’t apply to you on your credit file, make sure you report it and investigate whether someone has been using your details fraudulently. It’s important to check this and act on it, as taking the responsibility for someone else’s credit actions could be affecting your credit score negatively and will take a while to be investigated and resolved.
OBTAIN A MORTGAGE DECISION IN PRINCIPLE
When your getting close to the time when you will be actively viewing properties it might be a good idea to ask your mortgage broker to arrange a mortgage decision in principle.
A Decision in Principle is a formal indication from a lender that they would be willing to offer you a certain level of mortgage, subject to meeting their full lending criteria. It’s also sometimes known as an ‘agreement in principle‘ (AIP) or a ‘lending certificate’.
It will typically last between 30 and 90 days. It is not an absolute guarantee but rather an indication of the amount the provider would agree to if you were to pass all of their future assessments and checks.
Should you get more than one Decision in Principle?
How does a Joint Borrower Sole Proprietor Mortgage work?
DEALING WITH OUTSTANDING DEBTS
If you already have debt, you should focus on clearing your repayments in the short term in order to see your credit score improve. Don’t apply for new credit, as the checks and the use of more credit will see your credit score drop.
Don’t worry too much if you have a student loan. Having a student loan shouldn’t affect your mortgage chances but lender’s will still want to know how much you owe and whether you are making repayments yet.
If you’re looking to obtain a mortgage a good credit score will increase your chances of being accepted, as well as getting a lower interest rate. But if your credit score is low then it’s important to take steps to improve it.
