By Shaun M Bielby
Although we are approaching four years since the onset of the sub prime crisis which created a domino effect and led to the worldwide banking crisis, credit crunch and global recession, we don’t yet appear to be out of the woods and mortgage finance is still extremely difficult to obtain. This is especially the case for first time buyers who have limited savings for deposit towards their first purchase and have not been financially educated to help themselves to obtain a mortgage.
Lenders are heavily reliant on credit scoring techniques to assess whether a borrower is ‘creditworthy’ enough to allow them to take a mortgage but what does credit scoring actually mean? Go online and you are being bombarded with banners and adverts promoting the ability to discover your credit score or assess your credit rating. Even turn on the TV and you have Experian advertising it’s ‘Credit Expert’ service in prime time advertising breaks. Since lenders have significantly tightened their lending criteria, credit reference agencies are doing a huge amount of business from individuals worried about what is on their credit file or using the service if they have already been declined for a loan, credit card or mortgage. This helps to educate people about credit scoring and allows the would be borrower to keep an eye on their credit score until it appears sufficiently high enough to apply for a mortgage or loan.
Borrowers still don’t realise how much information is held by credit reference agencies and shared with would be lenders and this is getting more and more detailed as time goes by. How many people think nothing of missing a couple of payments on a contract mobile phone or missing a catalogue or credit card payment as there’s only a small balance outstanding? This has a hugely detrimental effect on a mortgage applicant’s credit score and it will more than likely lead to the mortgage being declined by a high street lender. It is essential, regardless of how little is outstanding on a finance agreement that monthly payments are maintained on time every month without fail.
If you have an overdraft limit on your bank account, the majority of these now show on your credit file and if you exceed your overdraft then this will be reported to credit reference agencies and will show as a ’1′ in your payment profile. This is interpreted by lenders credit scoring models as if you have missed a payment on a finance agreement. This can even happen if you are as little as £5 over your overdraft limit and there are some high street Banks and Building Societies that will decline an application if they find a ’1′ on your credit file within the last 12 months. Would be mortgage borrowers have to ensure that they conduct all of their finances satisfactorily or suffer the consequences.
The percentage of available unsecured credit being used is another key factor utilised in lender’s credit scoring techniques. For example, if an applicant has five hundred pound credit limits on a bank account and credit card but is up to the credit limit on each account then it appears that the applicant is over-committed and the application is likely to be declined. Having the credit, using it and paying it off in full every month will help to build an excellent credit score and show the lender that the applicant is able to manage their finances well. However, too many credit cards, even if there is sufficient available credit can also have a detrimental effect on credit rating when assessed against earned income. Thus if credit cards are no longer being used then it can be worthwhile closing these accounts and they will not be taken into account in a credit score.
Simple things such as how long an applicant has been at their current address or how long in current employment are other factors that will affect the score and the longer period of stability of address or employment will lead to a better credit score.
All is not lost for first time buyers should they fail a high street lender’s credit score as usually an increased deposit will reduce the pass mark or in the worst case scenario, should there be adverse credit registered against the applicants credit file then there are bad credit mortgage lenders that have lower credit score pass marks or some don’t use credit scoring. Typically, as long as there are no CCJs or Defaults registered within the last 2 years then a first time buyer may be able to obtain a mortgage with just 10% deposit.