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First Time Buyer Guide

The Mortgage Lounge

01

The basics

02

How much can I borrow

03

Mortgage schemes

04

Getting a decision in principle

05

Budgeting to buy a property

06

Credit scores and ratings

07

Buying a property

08

Applying for a mortgage

Home Mortgage Lounge First Time Buyer Guide
In this section...

    Credit scores and ratings

    Before mortgage providers consider lending you money, they will look at several different criteria to determine whether you are a suitable candidate for lending. One of the most important tools they use is your credit report, which gives them an indication of how likely you are to repay the money they lend to you. It’s important that you manage your credit report and the details on it so that it doesn’t have a negative effect on any credit applications.

    Almost every adult will have a credit history as they will have used credit at some point in their life. Even overdrafts, student loans or mobile phone contracts count as a credit agreement.

    The report brings together lots of financial information about you and presents a picture of how reliable you are as a borrower. Along with basic information like your name, address (and previous addresses), who you bank with and if you are registered to vote, it details all your credit arrangements and the outstanding amounts, as well as any applications you’ve made (and whether they were successful). This will be bank and credit card agreements, mobile phone, insurance and utility agreements, and whether you have missed or been late with any repayments. It also contains public record information about court judgements and fraud.

    What is a credit score?

    Your credit score is calculated based on the information in your credit report. Confusingly, each credit referencing company uses a different scoring system and will calculate your score differently, but for all, the higher the number the better! The maximum score with Equifax is 800 and the UK average is around 380. However, with CallCredit (soon to rebrand as TransUnion), the maximum score is 710 and the UK average is around 610.

    Your credit score is an assessment of how good (or not!) you are at paying back the money you’ve borrowed. Every time you request credit – set up a phone contract, take out a loan, apply for a credit card, for example –  your credit score goes down. Make all of your payments on time and your credit score is likely to go back up.

    How can I find out my credit score?

    There are four credit referencing companies in the UK – Experian, Equifax, Crediva and CallCredit. They are all obliged to produce a statutory credit report, giving a snapshot of your credit history, for free. It used to cost £2 to get the statutory report, but since GDPR came into force in May 2018, it is now free. Each company may have different information about you on their reports, although there will be significant overlaps.

    It is possible to access your credit report online for free. The two main providers are ClearScore (using Equifax data) and Noddle (owned by CallCredit) and they will show you your reports updated monthly.

    The credit referencing agencies all provide a premium service where you can view your “real-time” credit score & report and also be notified when any new searches are made on your record. These cost around £7-15 per month, but they all offer a 30-day free trial. You can take advantage of the free trial to view all of your information, just don’t forget to cancel it before the end of the 30 days!

    There is no ‘credit blacklist’ – Advisor Insight
    “Lenders use different criteria to come up with your credit score. If you’re refused a mortgage by one, it doesn’t mean the next one will. There is no universal credit score, nor is there a ‘credit blacklist’. At First Mortgage we keep up to date with different lenders’ criteria to see which ones will lend to you based on your credit history. When we check this, we do so without any impact on the score itself.”
    – Hazel, Edinburgh Walker Street branch

    Who can perform a credit search?

    Financial institutions can carry out a credit search, but only once you have granted them permission. They will receive your full credit record and current credit score to enable them to check that you are eligible for the product you have applied for. These credit searches leave a “footprint” on your credit record, which will usually remain there for 12 months.

    Some lenders will decline your application if you have a lot of footprints on your record as it may be a sign that you have been turned down by other providers, that you are applying for more credit than you can afford, or that you are a victim of identity theft.

    Employers and landlords sometimes carry out credit searches, but the information they receive is restricted to your credit score and any public record information about you.

    What is a soft credit search?

    Soft searches are used to verify your identity and to find out your credit score. When you apply for a decision in principle, the mortgage lender will carry out a soft search to verify that the information you have provided is correct. Soft searches are not visible on your public credit record, but you can view them to keep track of who has performed them. They are often carried out when you search for insurance quotations and the like. It is important to remember that soft searches have no impact on your credit score.

    How can I improve my credit score?

    It’s worth keeping an eye on your credit report, even if you’re not applying for a mortgage. Lots of companies refer to your credit report when making decisions about you and your finances: it’s in your interest to make sure they have accurate, up to date information about you that ensures you are accepted for whatever product you are applying for.

    There are four key areas to look at when trying to improve your credit score:

    • The first is to maintain your report; order a copy, check it for mistakes and correct any you find. Make sure you order from all credit referencing companies as they may not have the same information on you.
    • Secondly, take simple steps to ensure you boost your score such as register to vote, pay bills on time and avoid pay-day loans.
    • Third, be aware of who you are financially linked to: if you have a joint account, mortgage or loan, or pay utility bills with someone, then their financial history will be linked to yours. If you have moved on, make sure all the credit agencies are aware of this and they can disassociate you.
    • Finally, time applications right. Apply before a major life change (maternity leave, new job, career break), after a period of financial stability, and don’t make multiple applications for credit in the few months before you apply for a mortgage as these will leave footprints on your file.

    If you have any doubt about your credit score and how it will affect your chances of getting a mortgage, talk to your mortgage advisor.

    Having no debt might be as damaging as ‘bad’ debt – Advisor Insight
    “Many people assume that having no debt (or credit) at all will be good for your credit rating, but this is not the case. Your borrowing habits, and the way you use (or misuse) credit are the basis for lenders making decisions about how you will handle debt in the future. If they have nothing to go on, they may think you are a riskier prospect and lower your score. The good news is you can influence this: things like registering to vote, responsible use of a credit card and paying bills by direct debit can all boost a credit score.”
    – Paul, Manchester branch

    What does a poor credit score mean for my mortgage?

    Sometimes a poor credit score will mean an outright refusal from a lender. However, just because one lender will not give you money for a property, doesn’t mean that others won’t. The key to applying when you have a poor credit history is to know what lenders are looking for. This is where using a mortgage advisor is a real advantage as they know the whole market and what demographic or financial profile certain lenders are prepared to work with.

    You’re more likely to be refused a mortgage if you have a poor credit history, are not registered to vote, have made many credit applications or have a high level of debt. These are all areas that can be resolved, so even if you are refused a mortgage the first time around, making changes and trying again in six months or so could mean a successful outcome.

    We know what lenders are looking for – Advisor Insight
    “Being turned down for a mortgage can be so disappointing – but you’re not alone. As I look at the entire mortgage market I get to know what lenders are looking for in a borrower. Some only lend to a narrow profile of people; others accept smaller deposits or lower credit scores. If we can’t find a suitable lender straight away we can advise you on what to do to make your chances stronger when you reapply. Sometimes all it takes is time and a little patience.”
    – Kevin, Kirkcaldy branch

    What if I don’t have a credit score?

    There are a few reasons why you may not have a credit score. Here are a few of the most common:

    Being under 18 – It is not possible to take out a credit agreement if you are under 18, so you will need to wait until you are 18 and use the information above to build up a credit score from scratch.

    Not had credit in your name – If you have a mobile phone, but the contract is not in your name, then it will not count on your credit report. Also, if you pay bills jointly but the account is not in your name, then nothing will show on your report. You will need to apply for credit in your name to start building up a credit score.

    Recently arrived in the UK – Unfortunately, credit scores from other countries cannot be used in the UK when applying for credit. Again, you will need to start from scratch.

    Your credit history is out of date – As your credit history only looks at the past six years, if you have not had any credit in this time then you will not have a credit score.

    Check your credit report for issues and errors – Advisor Insight
    “It is surprising how many people have a default on their credit record and not even know about it. The most common issue we see is a default registered by a mobile phone company for a contract that was not fully settled. Reviewing your credit record once or twice a year is highly recommended!”
    – Neil, Glasgow High Street branch

    Glossary of terms

    Credit history – this is a record of all your current and completed credit agreements from the last 6 years, along with your payment records.

    Credit report – a detailed report of all your credit history, levels of debt currently outstanding, current and previous addresses, linked persons and any defaults, court judgements or convictions. It also shows all credit searches done on your account in the last two years.

    Credit score – this is a number calculated based on your credit report. Each lender and credit referencing company will calculate their own score based on their own criteria.

    Credit search – this is when you are applying for credit and the potential lender checks your credit report. This search (or footprint) is usually recorded on your credit report for 12 months.

    Soft credit check – used to verify your identity and credit score. Does not leave a footprint on your credit report.

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