Would you lend money to…you?
Most of us would think twice about lending money even to our dearest friends if we knew they had a history of absconding without payment.
The same holds true for banks – with the notable exception of the US sub-prime lending fiasco, which proved the obvious point that if you lend money to ‘un-creditworthy’ folk you may as well wave goodbye to your cash.
There are three main ways lenders check your creditworthiness:
The traditional way of weeding out applicants with a dodgy fiscal disposition is to take up a reference from their employer.
But this apparently straightforward process can sometimes hold up house sales, so to prevent any delays it’s best to check that your employer has responded swiftly once they’ve received the request.
A common problem is when employers don’t bother to complete the lender’s official form, and instead write a letter, which the lender will not accept.
In the same way that car insurers know from previous claims which drivers are statistically more likely to have crashes (young males), banks have a pretty shrewd idea about which mortgage applicants are more likely to default on a loan.
For example, research shows that there’s a greater chance that first-time buyers will get into trouble, perhaps because their jobs are less secure. It’s also true that self-employed applicants are statistically twice as likely to default on their mortgages as those employed in steady jobs.
Joint applications from married couples with dual incomes are also viewed more favourably than from singletons.
Every mortgage lender has their own particular credit scoring system. Points are deducted for various risks and if, when your total credit score is finally totted up, it falls below a certain figure, your application will be declined.
Typically, you will lose points if:
- You’re self-employed
- You’ve moved home recently or frequently
- You’re not on the electoral register
- This is your first mortgage or loan
- You recently started a new job or have changed jobs frequently
Check your electoral roll details are accurate and ask for a copy of your credit file every six months or so. By using services such as checkmyfile.com you can check your file instantly and start ironing out any inaccuracies or unwanted financial ties.
Such point scoring systems are obviously a bit rough and ready, and are not always terribly fair.
For example, it’s not impossible for a millionaire to be refused a mortgage because the computer software automatically marks down their application for other reasons. A whole multitude of factors can affect your overall credit score.
For example, failure to register onto the electoral roll when you change address will work against you. Or if you split up with a former partner with whom you shared a bank account your own score could continue to be affected by their irresponsible financial behaviour.
Most of us aren’t even aware of things that could be damaging our rating.
Today, a major part of the lender’s assessment of your suitability is carried out online via a credit reference agency. This search will immediately throw up any history of bankruptcy, or CCJs (County Court Judgments – see below), and show whether you have ever fallen behind with payments on any previous loans.
But as newspaper headlines remind us from time to time, the problem is that personal credit records are not always accurate, unjustly condemning innocent individuals to ‘debtor status’ in the eyes of financial organisations.
County Court Judgements – CCJs
You may have seen adverts proclaiming ‘CCJs – no problem’. Actually, the harsh truth is that when you’re trying to borrow big money, CCJs often are a problem.
If you have a CCJ for debt registered against you, it’s unlikely that mainstream mortgage lenders will want to do business. Instead, specialist lenders who deal with ‘credit impaired cases’ may be able to swing things, albeit at a higher interest rate and with lots of juicy arrangement fees.
But it’s not just ASBO-toting bad lads who get lumbered with CCJs. Right now there are thousands of people walking around completely unaware that their credit rating is besmirched, thanks to the ease with which CCJs for debt can be obtained.
To ascertain if any CCJ has been issued against you, a copy of your credit record can be downloaded online from either Experian or Equifax.
The good news is that CCJs only stay on your record for six years. Where the sum involved was less than about £3,000 and has now been repaid in full (ie the debt is ‘satisfied’) lenders may not be too worried even within a shorter period of time.
However, applications are likely to be declined where you have more than one CCJ, or for larger amounts, or where this wasn’t disclosed on the application form.
A good broker may be able to get a CCJ removed, allowing you to get a better mortgage deal with a mainstream lender. Some firms offer ‘credit repair’, where they aim to remove CCJs or get the money owed reduced. But their fees can be substantial, and success may depend on them being able to spot any procedural irregularities that can be challenged.
Mortgages should be straightforward.
Essentially you’re borrowing money to buy a house and in return paying interest on the loan. But after making a few enquiries, you soon realise that things are not quite as simple as they seem.
The problem with mortgages is the sheer variety of types, and the complexity of trying to compare like with like.
Even price-comparison websites can struggle to give an accurate picture. There are a large number of different organisations providing mortgages in the UK – not just banks and building societies but also some of the big insurance companies.
Most of these offer a range of frequently changing products. Despite drastically slimming down after the credit crunch, there are still well over a thousand mortgage deals to choose from.
With so many complex deals on the market, and a whole raft of hidden charges and traps, most experts recommend using a mortgage broker to steer a course through the financial quagmire.
A good broker should be able to cut out a lot of the hassle by warning you in advance of any credit-scoring issues, and should identify the best deal and know which lenders to apply to.
The snag is, there are plenty of ‘jack the lad’ brokers who are more interested in maximising their commission than matching you up with the best possible mortgage, so it’s important to pick a professional adviser who can access the whole market to find the best deal for you.