People often think that a mortgage lender will look at how good your credit score is. That isn’t right – sometimes you can get a mortgage with a not good credit score or you may be rejected with a great credit score.
Three key factors in getting a mortgage are:
- your deposit
- the affordability calculation – this is affected by current debts that you are repaying;
- your credit history – this is affected by current and previous problems in repaying debts.
So although you can get a mortgage with debts, debts do affect whether you will be offered a mortgage and how much you will be able to borrow.
1) How big is your deposit?
A bank will feel much happier about any minor credit history problems you have had in the past if you have a good deposit.
With a low deposit, less than 10%, everything else has to be looking great if you want to get a good mortgage deal.
So should you borrow to get a larger deposit? No!
Although having a larger deposit may make it look as though you can get one of the best buys on offer, in practice the extra borrowing is likely to mean that you will fail the affordability calculations so you won’t get a mortgage at all. Not a good idea.
2) Mortgage affordability
Affordability is a major issue in 2023
Affordability problems are much more common now because of the higher mortgage rates. A 200k mortgage may have been easily affordable at 2% interest but be too much at over 5%.
Even if you know that a mortgage will cost the same or less than your rent which you have paid without problems for years, you may still fail a lender’s affordability checks. You can improve the affordability calculations by looking at a longer mortgage term. This is becoming very common in 2023, but do not underestimate the problems with very long mortgages.
The mortgage affordability calculation will look into your outgoings in detail. When you apply for a mortgage you will be asked about debts, childcare costs, commuting costs and other expenses. The lender will want evidence about these costs, usually asking for three or six months of bank statements.
Your debts are an important part of this: credit card balances, loans, car finance payments etc.
A mortgage affordability calculator
Each lender has its own rules and these can differ a lot. One of the big advantages of using a broker is that they will have a good idea if you are likely to pass Bank A’s affordability calculations or if you would be better to apply to Bank B.
If you are thinking ahead to a future mortgage, is a good idea to get some feel now for what you may be able to borrow, without having to talk to a broker.
Most mortgage lenders have a “how much might we lend you” calculator” on their website. But most are very basic, just asking about your income and deposit.
But this Santander calculator has a few more details, including about your debts.
How your debts affect affordability
Debts that you are currently paying affect the affordability calculations directly.
Look at how that Santander calculation changes how large a mortgage you could be offered in this simple situation – one applicant, £45k income, wants to buy a 200k house, has a 20k deposit:
- with no current debts, the calculator suggests a possible mortgage of 202k;
- with a 5k credit card balance, that drops to 184k
- with a £200 a month car finance payment, it drops to 178k
- with a 5k credit card balance and a £200 a month car finance payment, it drops to 160k
- with a 15k credit card balance and no loans or car finance, it drops to 147k.
So quite low loan repayments and credit card balances can have a significant effect on the amount you can borrow.
It doesn’t matter whether credit cards are on 0% deals, the balance is still treated in the same way. Because the lender has no idea whether you will be able to refinance that debt when the deal ends.
3) Your credit history
Why you should do three checks
You must check your details with all three credit reference agencies: Experian, Equifax and TransUnion.
This applies even if:
- you have never missed a payment in your life; or
- you look at a credit report every month and it’s great.
There could be something on a credit reference agency you haven’t looked at that is wrong – perhaps an incorrect link to someone else’s account, or a wrong previous address, or a debt you are unaware of from when you moved house.
An error on your file can take a long while to get corrected, so check now!
Finding an unexpected problem when you are in the middle of buying a house can often mean your purchase falling through. This really does happen to hundreds of people every year, see A credit rating dispute could cost me getting a mortgage where an error by a bank took six months to sort out – and was only finally resolved when a national newspaper got involved.
If you have a perfect record with all three CRAs, great! Provided that you don’t have old debts that you are still repaying that no longer show on your credit, see below.
Different sorts of current and previous problems
With a less-than-perfect score, how serious is your credit problem? Mortgage lenders don’t use the score that you see – they are interested in the underlying problems.
Mortgage lenders usually rank difficulties in roughly the following order:
- late payment
- missed payment,
- AP/debt management
- insolvency (IVA, DRO, bankruptcy)
Most mortgage lenders also regard payday loans as a major problem unless they have been repaid more than 2 years ago. if it has been recent. This applies even if the payday loans were repaid on time, see Payday loans make it harder to get a mortgage.
And how old are the problems?
It isn’t just the type of problem that is important, it also matters how long ago it happened and when you sorted it out.
A debt problem that you have “solved” is much better than one that is still ongoing… so if you have defaults or CCJs on your credit record you have to settle these debts.
A settled default shows you had problems in the past. But any default which is still outstanding shows you still have debt problems – not good for your mortgage application.
Some lenders will reject any applications with defaults even if they are settled. But some high street lenders don’t mind past problems:
- if your defaults were more than three years ago
- and they have been repaid a while ago. One year used to be common, now many lenders want to see two years free of problems.
So what the default date is on your credit record is really important as mortgage lenders care more about recent problems.
Also a defaulted debt disappears from your credit record six years after the default date. So if you have several old defaulted debts from 2018 which you have settled that will be dropping off your record in September 2024, think about delaying any mortgage application until after they have gone. This will give you the widest choice of mortgages including the best deals.
Problems that no longer show on your credit record
Once a defaulted debt has dropped off your credit record, it will still impact a mortgage application if you are still paying it, The lender will be able to see that from your bank statements.
If you have been in a DMP for 8 years and all the debts have defaulted, your credit score may be great. But a lender will see the DMP payments. Your score doesn’t matter, it is the debt problems that do.
Once you have settled old debts no longer on your credit record, after 6 months you can make a mortgage application and the lender won’t see the old problems. (Of course you need to avoid applying for a mortgage to a lender that is part of the same banking group. Or they may be able to see your previous problems from their internal records. )
What is your overall picture like?
How good is your overall picture: deposit – affordability – current debts – credit history? If it’s not looking good, then you are going to have to spend some time, possibly even years, improving it.
Read up about Snowballing, this is the fastest way to clear debt. Time is a great healer of credit records, adding a year of perfect credit ticks every month, combined with your credit card and overdraft balances falling can make a big difference.
Also read How to improve your credit record for a mortgage. And if the default date for one of your debts looks a lot too recent, you should try to get this corrected, see What should the default date for a debt be?
10 tips for a trouble-free mortgage application in the next year
Once you know when you want the mortgage, you must do everything possible to avoid new problems appearing. So:
- don’t make any credit applications in the few months before asking for a mortgage
- no payday loans in the last two years before a mortgage application.
- don’t use Klarna or other Buy now, pay later lenders in the 6 months before a mortgage application.
- if you have any 0% deals ending in the next few months, pay down that balance as fast as possible as you don’t want to have to refinance just before a mortgage application.
- if you cancel any direct debit, double-check your account is clear first. Be especially careful with mobile contracts – a common cause of credit record problems if the last bill isn’t fully paid.
- make sure credit card balances are reducing and that you are paying more than the minimums. The mortgage lender can see not just your current balance but also your borrowing and repayment history. Ideally don’t spend on the cards at all if you are trying to reduce a balance.
- reduce your overdraft usage.
- keep “discretionary expenses” well under control. When someone says their recent bank statements aren’t normal because they went on a good holiday in November and then it was Christmas, the lender is likely to think that these things happen every year!
- don’t change jobs. This may not be under your control but if you have any choice, this is not the time to switch employers.
- don’t change your name. It won’t stop you getting a mortgage but it can cause temporary problems on credit records so why take the risk?
Getting that mortgage – who and how to apply to
Unless your credit record is great, it’s good to go through a broker who should be able to advise which lenders will be happy with your credit record.
Every lender is different. Not only do they use their own assessment calculations, but some are more flexible than others. Some high street lenders adopt a Computer says No approach to low and average deposit loans if you have any recent credit record problems at all. If you have a very large deposit, other lenders may be more willing to accept an application with recent problems.
Contacting banks individually can waste a lot of your time and any rejected mortgage application will leave a ‘footprint’ on your credit record. So if any of the following apply, consider going to a mortgage broker instead:
- you have a low deposit;
- you need a large loan in relation to your income;
- your credit history isn’t spotless; or
- there is anything unusual about your situation.
Money Helper has advice here on finding a broker Where to go for the best mortgage deal.