As a first time buyer, it can be daunting not knowing the full process of buying a property. Part of your mortgage application will include a credit check by your lender to ensure that you can afford the repayments.
You may have heard this term before, however, it’s not uncommon to not be aware of what is fully involved. In this guide, we’ll walk you through the credit check process and how this may affect your ability to obtain a mortgage.
What are mortgage credit checks?
Mortgage credit checks are assessments that lenders conduct on your financial history in order to determine the risk level associated with offering you a mortgage.
Credit checks essentially evaluate your ability to pay a mortgage by looking at your past borrowing and repayment history on your credit report. This report also includes details on any missed payments, defaults and outstanding debts.
What does a mortgage credit check involve?
Before proceeding with a mortgage application approval, lenders will look at your full financial history. There are two types of credit checks that they may perform: soft credit checks and hard credit checks.
Soft credit checks
This type of check does not require a full search of your credit history and will only be used to get a basic understanding of your creditworthiness. It will not be visible on your credit report and other credit companies will not be able to view this information.
Soft credit checks can also be conducted by yourself when checking your own credit report, and there are many sites that allow you to do so for free.
Hard credit checks
This type of credit check involves searching your whole credit history to identify any issues with your ability to repay your loans or other financial obligations.
Hard credit checks will leave a footprint on your credit report, which can be accessed by lenders in the future.
When do mortgage lenders perform credit checks?
Mortgage lenders will usually perform credit checks at two key points in the house buying process.
Firstly, a soft or hard credit check will be conducted early on in the application process for a mortgage in principle. Secondly, one will be conducted before the final approval or exchange date to ensure your financial situation has not changed.
Do you need a credit check to get a Mortgage in Principle?
Yes, lenders will usually need to conduct a soft credit check to create your mortgage in principle in order to assess your eligibility and borrowing capacity.
The document will outline how much you can borrow and that you have been approved for that amount. However, it is not a guarantee that you will receive that mortgage deal. It simply states how much the lender is willing to lend you.
What is the minimum credit score needed as a first-time home buyer?
Although there is no specific minimum credit score required for first-time buyers, higher scores do generally give you a greater chance of securing a mortgage.
Different lenders have their own risk assessments and requirements from their borrowers and so some may require higher credit scores than others.
Generally speaking, the higher the credit score you have the less you will be viewed as a ‘risky’ borrower, making you more likely to be approved. However, many lenders will have their own special products such as ‘bad credit mortgages’ for those who don’t have a great credit history.
How will your credit check impact your mortgage eligibility?
As we’ve mentioned, the better your credit score, the better chances you have for securing a mortgage with your chosen lender. A higher score indicates you are a low risk borrower, making it easier to get a mortgage and a potentially better interest rate.
Your credit check is made up of a number of different factors, each of which are likely to have some sort of impact on your overall credit score and therefore, your mortgage eligibility.
Areas your lender will examine in your credit check can include:
- Loan approvals and rejections
- Repossessions
- Bankruptcy
- Credit use
- Credit enquires
- Income and other sources of earnings
- Overdraft usage
- Any other personal information that may affect your ability to repay a loan
Should you check your credit report before you apply for a mortgage?
Yes, we highly recommend that you check your credit report yourself before you apply for a mortgage.
By doing so, you will be able to see which areas of your credit report could be improved. You can then make a plan on how to improve these areas and save yourself the potential disappointment of being rejected from a lender.
What to do if you have a poor credit score and want a mortgage
If you have a poor credit score, there are a few things you can do to boost your chances of getting a mortgage.
Improve your credit score
This may seem obvious, but you may be surprised how many first-time buyers don’t know how to improve their credit score.
Building up your credit score will illustrate to lenders that you can meet your repayments and manage your money. This can therefore make you more of an attractive borrower to lenders.
Improving your credit score isn’t a quick process, but there are simple steps you can take which might make a difference, such as:
- Removing any debt before you apply for a mortgage
- Check for any mistakes on your credit report
- Register to vote
- Pay your phone and utility bills on time
Save for a bigger deposit
The higher your deposit is, and the lower your loan to value (LTV), the less money you will need to borrow.
This shows lenders that you can save money and essentially make them feel more relaxed about your ability to meet your payments.
You could also consider a guarantor mortgage, which is a type of mortgage that uses someone else’s home as ‘security’. This reduces the risk level for the lender as it ensures they won’t be out of pocket should the monthly repayments not be made.
Seek professional advice
Here at Barlow Irvin, our team of mortgage brokers specialise in finding mortgages for those in a number of different financial situations, including those who have bad credit.
We will help you assess your financial situation and develop a plan to improve your credit score and secure a mortgage with an appropriate lender. We have great connections with a number of different highstreet and independent lenders, meaning we always have options available should the standard lenders not be appropriate for you.
Be honest and transparent
You should always be honest with lenders about your credit history and explain why you might have had financial difficulties in the past. Lenders will be able to see your full credit history, so it’s best to be transparent from the get-go.
It will likely work in your favour too if you can demonstrate your ability to repay the mortgage by provisioning evidence of a stable income and employment.