How Credit Scores Are Calculated For Mortgage Purposes And How This Affects Offers On Mortgages By Lenders.
You may not even be aware that you have a credit score, but if you’ve ever applied for a mortgage, a car loan or even had utilities, such as gas or electricity connected to your home, it’s likely that your credit score has been checked.
A credit score is effectively a ‘risk-assessment’ carried out by a lender to see what the likelihood is of you either paying or defaulting on your bills. It is a mathematical formula that compares your bill-paying history with the histories of millions of other people.
It will compare your debts, your credit history, the length of your credit history, new loans and anything else considered relevant. The resulting figure tells lender whether you have a good or bad credit score. If yours is good, you are likely to be accepted for certain offers on, for example, cars or get good rates of interest on loans.
If, however, you have a poor credit score, you will find it harder to qualify for certain offers and the interest rates you pay are likely to be higher. Basically, the higher your credit score – the more desirable you are as a customer to someone like a mortgage lender.
Roughly 35% of your credit score is determined by your bill-paying history: late payments, bankruptcy, late collections etc, can all give you a low credit rating. It is generally checked over a two-year period and it is the more recent debts that carry the most weight.
Mortgage lenders also take into account your income and your potential earnings in the future.
Someone with a poor credit score may find themselves being refused a mortgage, based on the calculations involved in their credit score or will find themselves paying a higher rate of interest than someone whose history makes them ‘less of a risk’ or a more desirable customer.
Even if you have obtained a mortgage, an adverse credit rating can make it harder to remortgage – especially if your credit score is impaired by defaulted payments to the current lender.
It is possible to improve and even recover a low credit score. Credit scores can be applied for and then it is possible to see where there are problems; for instance a bankruptcy can remain as a factor in a score for up to 10 years and can have a significantly adverse effect.
Yet by managing finances carefully, it is possible to accumulate ‘points’ and change the nature of your rating, making things like a mortgage or a remortgage much more viable options. Simple things, like ensuring that loans or debts payments are met on time can positively affect an impaired credit score.
Even keeping an eye on your credit card can have an effect; mortgage lenders view people who owe smaller amounts on many credit facilities as being in a lower risk bracket than those who owe large amounts on relatively fewer.
Careful credit management, over time, can raise your credit score to a level where potential lenders can view you as a desirable client.