‘Will a no/low credit score affect my chances of getting a mortgage?’
Published 6th March 2018
People worry that it can be difficult enough getting a mortgage deal with a reasonable credit score – but what do you do if you don’t even have that? If you’re in that position and you’re asking yourself, “How do I get a mortgage when I have no (or a low) credit score?”, then you’ve come to the right place. We’ve gathered together here all the information you need to help you to achieve your dream of homeownership.
- I’ve never had credit before. Is this a good thing?
- How this all effects you?
- A word of warning
- What next?
- Take care of the basics
- Make good any problems
- Start building a good credit history
- How can we help you?
As straightforward as this process is, it is likely you will still need some more in-depth advice into each area, so read on for more information.
I've never had credit before. Is this a good thing?
First up, an uncomfortable truth. You might think that if you haven’t had credit before – or if you’ve had very little credit, which you’ve paid off as agreed – then you’re in a strong position when it comes to applying for a mortgage. You have no black marks, no red flags, no financial skeletons in your closet. The bad news is that you are potentially in no better a position than if you had a chequered credit history – and, in fact, you could be worse off.
The reason is that lenders look for a pattern of behaviour as part of the process of making a lending decision, and if there is no record of behaviour to see a pattern in, then you are an unknown quantity. You could be seen as a risk, as they have no evidence that you can manage your finances well.
We know that seems unfair, but you need to know where you stand.
How this all affects you?
We’ve already mentioned that you could be seen as a higher risk if you have no or a low credit score. Let’s consider the potential impact of that on any mortgage applications you might make.
- The lender says ‘No’ – they just turn you down flat.
- The lender asks for a bigger deposit – they’re not prepared to offer you as much as you want to borrow, but they do make an offer, leaving you with the problem of coming up with the additional money.
- The lender charges higher fees – limited choice could result in you having to pay more to the lender that is happy to assist.
- The lender charges a higher rate of interest – they do this to reflect the perceived increased risk of lending money to you.
All of this can be dispiriting. It can feel like you are being unfairly punished, sometimes for no reason other than that you are just starting out and have yet to prove yourself.
Sometimes you just have to take their decision on the chin, either because you can’t at the moment raise a bigger deposit or because you have to wait for something to drop off your credit report. (Things typically stay on there for six years.)
Other things you can do something about, and we’re going to take a look at those things shortly.
A word of warning
Whatever you do, resist the urge to make scattergun mortgage applications, in the hope that you get an acceptance. For a start, you likely only have access to mainstream lenders, and they can be the least flexible of all when it comes to people with a low or no credit score. All you’ll do by approaching them one after the other is potentially get a series of rejections, and a record of credit applications that could do further damage to your credit score.
Unsure how to proceed? Get in touch with one of our expert advisers for more information, or read on for our detailed step-by-step guide for how to get a mortgage with no/low credit score.
As we’ve established, whether you have a credit history with a low score, or little or no credit history to speak of, you need to approach getting a mortgage in pretty much the same way. The main thing you have to do is establish a reasonable credit record, and we’ve broken down some of the actions you can take into these three stages:
Stage 1: Take care of the basics
Stage 2: Make good any problems
Stage 3: Start building a good credit history
We’ve broken things down further and explained each individual step you need to take within each stage, to make it all as straightforward as possible.
Let’s get started.
Take care of the basics
There are some things you can do that are pretty basic. These are good practice for everyone, no matter what their credit status is – think of them as housekeeping duties, and get into the habit of doing these regularly, perhaps every one or two years.
Step 1. Get on the electoral register
This is so easy to do, and it can make a big difference. When a lender assesses an application for credit, they are looking for two main things: they want to be confident they know who they are lending to, and they want to know how you manage your money. This falls into the first area.
Step 2. Get copies of your credit report
There are three main credit reference agencies in the UK: Experian, Callcredit and Equifax. They each hold information about you, and they could each hold different information. Because of this, you should get a copy of your credit report from each agency and check that the details recorded are accurate.
Incidentally, if you check your own credit report it doesn’t register in the same way it would if a potential lender checked it, so don’t worry on that score. You can check your own record as often as you like.
Step 3. Correct any errors on your credit report
If you find any errors on your credit report, then get in touch and ask for them to be updated or altered. This can take a few weeks, but it’s essential that the information potential lenders access about you is correct – an error could make the difference between a ‘yes’ and a ‘no’.
Just to be sure the changes have been made, give it a few weeks then request another copy of your report to check the information has been updated.
Make good any problems
At this stage, what you are left with on your credit report are good and possibly bad entries. The good entries obviously aren’t a problem, but anything that can be classed as an adverse credit event potentially is. In some cases, it’s something that you can do something about. Some things help now, and everything can help in the future – the longer ago something happened, the less impact it generally has.
Step 1. Get payments up to date
If you have any outstanding payments, where possible get them up to date. If you always wait for the ‘red letter’ before you pay a particular bill, try and stop doing that – pay as soon as you get the bill in if you can. Don’t let a bad habit ruin your chances of getting a mortgage.
Step 2. Settle outstanding debts
If you have any old, outstanding debts, it could be beneficial to pay them off where possible. Whether this is a default or CCJ or something else, it may help if you get it up to date. It will likely drop off your record in six years, and the longer ago it happened, the less impact it will have, but some lenders are likely to look more favourably on old, settled debt than the old debt that is still outstanding.
Start building a good credit history
In order to prove you will handle your accounts responsibly, you have to have some accounts to handle. That means you need to access some form of credit. If you have a mobile phone on a monthly contract, then that’s a start and it should help – but not as much as having a loan from a major bank, for example. Here are some suggestions.
Step 1. Get a credit card
Whilst we do not advocate getting yourself into debt, having a credit card can be a useful way of getting a record of regular payments on your credit file.
If you are starting to establish a credit history from scratch, then you should have more options when it comes to applying for one. If you have a low credit score and a history of debt problems, then you may have to apply for a ‘bad debt’ credit card.
Whatever type of card you get, don’t be tempted to allow debt to build upon it. Use it for your groceries or fuel, even the occasional treat, but pay it off in full every month whenever possible. The purpose of the exercise is to show a regular pattern of spending – borrowing and repayments – proving you can manage your money. If you let a balance build up, it’ll do the opposite.
Step 2. Take out a loan
As above, if you can borrow some money and pay it back as agreed then that can show a positive pattern of behaviour on your credit report.
One major caveat here is that you shouldn’t – ever, if you can avoid it – take out a payday loan. Rather than helping show a positive pattern of behaviour, they suggest you can’t live within your means. Even if you pay it off in full, as agreed, they can damage your credit standing in the eyes of a mortgage lender.
Step 3. Reduce your debt
This might seem to contradict what was just said above, but we’re talking about historic debt here. Say you have a credit card that is up to the limit and has been for months; start to pay that off if at all possible. Cut it up, if it helps, so you can’t spend on it again, but aim to see the balance go down, not stay at the limit. Regular payments, made on time, and a reduction in the overall level of debt is what you’re aiming for.
Step 4. Keep on top of all your payments
Aim to avoid having late or missed payments showing up on your credit report. The idea is to build a new credit profile and, since items stay on your credit report for six years, you need to keep on top of things now to avoid ending up in the same position in the future. A great tip here is to set up a direct debit to ensure you never forget to make that minimum payment on time. Just make sure you know when it is due and have enough money in your account to pay it. If you can afford to pay more you can always still do this when you get around to it. Making that minimum payment on time will ensure it never shows as a late or missed payment on your record.
How can we help you?
If you’re struggling to get a mortgage because you have no or a low credit score, or you’re just not sure what to do next, get in touch, because we can help. We have a specialist team of mortgage brokers who have experience of working with people with a low or no credit score, plus access to the lenders from across the UK mortgage market – meaning we can access deals you probably can’t. Contact us now for free initial help and advice.