Topics
What Is the Minimum Credit Score Needed for a Mortgage?
There is no credit score minimum needed to get a mortgage. However, the higher your credit score, the better your mortgage chances. A good score proves you are responsible with money and would make a responsible borrower. Plus, a good credit score opens you up to more lenders than a bad one. However, those with a low score can still get their mortgage applications approved.
There is no universally recognised good credit score. Each individual lender has their own means of judging your credit responsibility. They each define low and bad credit scores differently. Other factors also come into play when deciding whether or not to approve your loan, including how much deposit you have saved, your income level, the hours you’re looking to buy, and your age.
Can You Get a Mortgage With a Bad Credit Score?
It is possible to get a mortgage with a bad credit score. However, you most likely won’t be able to get as good a deal as someone with a good credit rating. For example, you’ll likely have to put a larger deposit down and will have to accept bigger interest rates.
Not all mortgage lenders approve mortgages to those with bad credit. With bad credit, you could be deemed as being too risky a borrower with a high chance of defaulting on the loan.
If you’ve got a bad credit score, you should use a bad credit mortgage broker to find a suitable deal. These brokers will be able to find you mortgage lenders who are willing to approve loans to those with bad credit while asking for a reasonable deposit and interest rate.
Check Your Credit Score Before Applying for a Mortgage
While there is no universal minimum credit score needed for a mortgage, some lenders do impose a minimum score for their loans. It’s definitely worth checking if your chosen lender has a minimum credit score before applying for a mortgage with them. This will save you time and effort instead of waiting to be rejected.
You can find out your credit score on TransUnion, Experian, or Equifax for free. Several online credit score checkers will give you more of a general overview.
It’s also important to check your credit report for any inaccuracies or errors.
If you identify anything incorrect, you can dispute the inaccuracy with the company that added it. While this can be a long and complicated process, it’s definitely worth getting your credit report corrected, especially before applying for a mortgage. Inaccuracies can slow the application process and even result in your mortgage application being rejected.
If you use a mortgage broker, they’ll be able to help you identify and remove inaccuracies that appear on your credit score.
Avoid hard credit checks
It’s also worth checking if the lender you go to conducts what is known as “hard credit checks” of your credit score.
Being rejected for a mortgage won’t necessarily harm your credit score, but a hard credit check will. These checks normally stay on your credit report for around two years and work to lower your credit score. So, you need to keep them to a minimum. For this reason, it’s better to use a mortgage broker who will find you a lender that does not do hard checks and offers mortgages to those with poor credit.
How Credit Reference Agencies Assign Credit Scores
The three main credit reference agencies score credit differently.
Mortgage lenders in the UK tend to use either TransUnion (formerly known as Callcredit), Experian, or Equifax to determine your credit score.
The main thing these credit reference agencies have in common is the tiered grading system that the credit scores fall into. Your credit score can be: “Excellent”, “Good”, “Fair”, “Poor”, or “Very Poor”.
To give you an idea of how each credit reference agency works, here’s an overview of their scoring systems:
Experian
Experian grades credit scores out of 999.
- Excellent: 961 – 999
- Good: 881 – 960
- Fair: 721 – 880
- Poor: 561 – 720
- Very Poor: 0 – 561
Equifax
Equifax grades credit scores out of 700.
- Excellent: 466 – 700
- Good: 420 – 465
- Fair: 380 – 419
- Poor: 280 -379
- Very Poor: 0 – 279
Transunion
Transunion grades credit scores out of 710.
- Excellent: 628 – 710
- Good: 604 – 627
- Fair: 566 – 603
- Poor: 561 – 565
- Very Poor: 0 – 550
How Do Credit Reference Agencies Determine My Credit Score?
While credit reference agencies score your credit differently, agencies generally use the same sources of information to determine what your credit score is.
These sources include:
- Payment history: Agencies look at how well you’ve been able to pay back credit, loans, and mortgages in the past. Missed payments, late payments, defaults, and bankruptcies will all negatively impact your credit score.
- Credit utilisation: How much credit you use versus your credit limit. Ideally, you should be using much less credit than your credit limit. However, it’s important to use some of your credit to prove you can responsibly pay it back.
- Length of credit history: The longer your history, the better. This is especially true if you’ve managed your credit responsibly within this time.
- Types of credit: The more types of credit you have managed responsibly, the higher your credit score will be. For example, if you’ve responsibly used loans, mortgages, and credit cards in the past, you’ve got plenty of evidence of being responsible with credit.
- New credit: If you’ve made any recent credit applications, these will be analysed thoroughly. If you’ve had one credit application approved recently, this won’t impact your credit score. However, if you’ve made multiple credit applications recently, your credit score will likely be lowered (especially if some or all of these applications were rejected).
- Personal information: Agencies will look at your name, current address, and previous addresses. For example, Experian looks at the last six years’ worth of addresses.
- Public records: The reference agency will also look at public records as a means of verifying your personal information. For example, they’ll likely look to see if you’re registered on the electoral roll.
However, the specific calculations used to determine exact credit score figures differ from agency to agency. In the US, the FICO model is widely used. However, there’s not a comparable scoring system in the UK.
How Big a Deposit Will I Need for a Mortgage if I Have Bad Credit?
There is no universal deposit size that you’d have to contribute to get your mortgage approved. The size of the deposit you would have to make depends on how bad your credit score is, your job type and income, and the house you’re looking to buy, among other factors.
However, most lenders will expect applicants with poor credit scores to provide at least 30% of the house’s value for the deposit.
For example: If the house you are looking at buying is valued at £300,000, you would be required to save up for a deposit of £90,000.
Again, this is just an example, and every lender will ask for a different deposit size.
Can I Get A Mortgage If I Have No Credit History?
It is possible to get a mortgage if you have no credit history at all; however, you would probably need to use a specialist lender. A bad credit mortgage broker will be able to suggest specialist lenders who deal primarily with mortgage applicants who have poor or no history. It’s very unlikely that you’ll be approved by a high street bank or online mortgage firm with no credit score.
How to Improve Your Credit Score for a Mortgage
If you’re struggling to find a mortgage lender willing to offer you a reasonable loan, you could make changes to improve your credit score.
You can improve your credit score by doing the following:
- Avoid credit applications in the year before completing your mortgage application. Having too many credit applications in your history can make you look financially irresponsible. Credit applications also require hard credit searches, which lower your credit rating.
- Pay back all your credit on time. Late credit payments suggest that you may make late mortgage payments should your application be approved.
- Keep an eye on your credit score to see if there are any areas of improvement you can make. Also, keep an eye out for inaccuracies.
- Keep your credit card utilisation as low as possible. If you keep your balances below 25%, it suggests you’re fully in control of your spending.
FAQs
Can you get a mortgage with a credit score of 550?
Yes, it is possible to get a mortgage with a credit score of 550. However, depending on which of the major credit reference agencies you received this score from, a score of 550 can either be excellent or poor. For example, if you received it from Equifax, it would be considered “Excellent”. On the other hand, if you received it from TransUnion, it would be considered a “Very Poor” credit score.
However, even if this credit score of 550 was from TransUnion, it would still be possible to get a mortgage.
How far back into your history do mortgage lenders look?
Mortgage lenders will review the last six years of your credit history. This is to provide them with insight into any defaults, missed payments, or bankruptcies that have impacted your credit score in recent history. Defaults, for example, stay on your credit report for six years. So, it makes sense that mortgage lenders will look six years into your financial history.
Final Thoughts
It’s definitely possible to get a mortgage with a low credit score; you don’t need a “good” credit score to buy a house. However, you will need to be prepared to pay large interest fees and a big deposit to make up for your low credit rating.
It’s important to remember that there is no such thing as a minimum credit rating, as all credit scores can be accepted for a mortgage.
Sources:
https://haysto.com/mortgage-guide/what-credit-score-do-i-need-to-get-a-mortgage