Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in and we’ll get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his advice to a reader below. If you have a question for our experts, email us at [email protected].
Question: I’m planning on buying my first home in the next couple of years. As a student a few years ago, I had an old mobile phone contract that was tied to a bank card that I no longer used. As a result a few payments bounced, and these damaged my credit score. I worry about this a lot – how long is this likely to follow me around for, and will it mean I get a worse mortgage rate, or worse still – mean I am not able to get a mortgage at all?
Answer: Buying your first home should be exciting, but it can be a challenge to get a mortgage if you have a poor credit score. Whether you’re a first-time buyer or an experienced home-mover, adverse credit or issues managing debt can impact your credit score and make apply for a mortgage more complicated.
Almost any bad credit issue – including missed payments – can cause problems when it comes to getting a mortgage. This is because credit problems suggest to lenders that you might struggle to make your repayments on time, meaning that they would be taking on a higher risk if they decided to lend to you.
The most important things to consider are how severe the credit issue is, as well as how recent it is. Smaller credit problems such as minor missed payments will not look as bad to a lender as more major issues such as bankruptcy. Also, the longer it’s been since the bad credit event, the less of a negative impact it will have on your credit score and the mortgage options available to you.
For your situation, time will have certainly healed any wounds of the past and your credit score will have improved. It’s a good idea to check with the main credit reference agencies (Equifax, Experian, TransUnion) before applying for a mortgage to get a picture of your credit score.
There isn’t a minimum credit score required for buying a house, which means your score will vary between lenders. Most top credit rating agencies have 5 categories for credit scores: excellent, good, fair, poor, and very poor. Ultimately, the higher your credit score, the better the chance of getting the mortgage you need.
On a wider note, if you have experienced arrears, defaults, individual voluntary arrangement (IVA), or county court judgements and looking to buy your first home or moving home but your existing lender has declined your application, do not lose heart as their will be options available.
There are thousands of mortgage products on the market offered by more than 120 lenders, so while your current lender might say no you can be sure there will be an option out there. It’s important to manage expectations though, as the severe the situation the likelihood you will face a higher rate or need to put down a higher deposit when purchasing.
To help improve your chances and give yourself the best chance of getting a mortgage, you can:
- Make sure you’re registered on the voters roll.
- Always pay rent and bills on time
- Set up direct debits for regular bills, like your phone, gas, electricity, et cetera.
- Make small purchases on a credit card which you always pay off every month.
- Pay off any other debts you may owe. It will also help reduce your debt-to-income ratio, an important factor for lenders when assessing your loan application.
- Check your credit report regularly: regularly checking your credit report will allow you to identify any errors or discrepancies that could be adversely affecting your score. Make sure to check all three of the main credit reporting agencies: Experian, Equifax and TransUnion. It’s important to note that these agencies use different scoring models, so check all of them to ensure that you get an accurate overall picture of your credit health
- Avoid moving home frequently: if you currently rent and have a history of moving about a lot this can be seen by lenders as indicative of an unstable living situation.
And finally, speak to a whole-of-market mortgage broker, I have only scratched the service on options for those with adverse credit and there are an array of options.
