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What do mortgage lenders look for in your credit report?

Andre Spiteri
9 May 2018

A deep dive into how your credit report can influence mortgage lenders’ decisions

Lenders base mortgage decisions on several factors. They’ll look at what you’ve written on your application and they’ll consider how you’ve dealt with them in the past. But, most of all, they’ll want proof you’re reliable, trustworthy and can actually afford a mortgage.

Any mortgage lender will almost certainly look at your credit report. Checking your current financial situation and borrowing history helps them work out how much they’d be prepared to lend you, and whether they can trust you to pay it back.

Here’s what lenders like (and don’t like) to see on your credit report, and some tips on putting your best foot forward.

How much credit you’re using

Using a credit card regularly and paying it off on time is looked upon favourably by lenders, because it shows that you know how to manage your money well. This sets their minds at rest that you’ll make your mortgage repayment a priority.

On the other hand, if you’re using a large proportion of your credit limit, it can suggest that you’re having trouble living within your means.

A mortgage is probably the biggest financial commitment you’ll ever make. So regularly using too much credit can make lenders feel uneasy and less willing to lend to you.

Before you apply

As a rule, avoid using more than 50% of your total credit limit. So, if your available credit across all your cards is £2,000, you shouldn’t use more than £1,000.

Lenders tend to see anything over this limit as a bad sign. For this reason, try bringing your credit utilisation down before applying.

How much of your monthly income goes towards paying off your debts

This is called your debt-to-income ratio, and it’s expressed as a percentage.

Let’s say you earn £2,000 a month. £500 goes towards paying credit accounts like your phone bill, car loan and credit card. Your debt-to-income ratio is 25%.

Your lender will expect you to have enough money available each month to cover your mortgage repayment. Looking at your current financial commitments relative to your income helps them work out how much more you could set aside without getting into trouble.

Before you apply

Every lender has their own policy on what’s an acceptable debt-to-income ratio. That said, you won’t be surprised to hear that, the lower it is, the better. A lower debt-to-income ratio shows lenders you have enough money to afford your monthly repayment.

For this reason, it’s worth trying to pay off as much of your debt as possible before applying. Here are a few tips:

  • If you have large debts, such as a car loan, use part of your savings to clear them

  • Alternatively, consider increasing your monthly repayments. This will temporarily raise your debt-to-income ratio, but it’ll help you clear the debt sooner

  • If possible, postpone larger purchases until after you’ve cleared your debts

Your payment history

Always paying your debts on time is the best way to show lenders you’re reliable and trustworthy. In contrast, missed payments will give a negative impression.

The more recent your missed payments are, the worse it’ll look, because it suggests you’re currently struggling to pay your bills. However, do bear in mind that missed payments, defaults and county court judgements stay on your credit report for six years.

Before you apply

You can’t remove a missed payment from your credit report unless it’s there by mistake (in which case you should raise a dispute). So, your best bet is to prevent it from happening in the first place. It’s worth setting up direct debits whenever you can. You can get your bank or lender to set one up for you. This will make it less likely that you’ll forget to pay a bill.

If you do miss a payment, don’t panic. Try paying it off as soon as possible, before the situation escalates. It’s better to pay a debt late than not to pay it at all, because it shows you’ve at least tried to correct your mistake.

Your search history

Every credit application usually involves a credit check called a hard search. This leaves a mark on your credit report which other lenders will be able to see for up to two years.

You don’t need to worry about the odd hard search here and there. But several hard searches around the same time could suggest you’re having financial difficulties, even if it isn’t true. This will make lenders feel less comfortable about approving your application.

Before you apply

  • Space out your credit applications as much as possible. It’s a good idea to wait at least a few months in between applications.

  • Use an eligibility checker (like the one on your ClearScore offers page) whenever possible. This helps you find out your chances of getting accepted without leaving a mark on your credit report.

  • Avoid applying for credit in the run up to your mortgage application.

In a nutshell:
  • Mortgage lenders use your credit report to build a picture of your financial situation and past borrowing habits. This helps them decide how much you can afford to borrow and whether you can be trusted to pay it back.

  • Use credit to show you’re responsible, but try to keep your utilisation under 50%.

  • A low debt-to-income ratio improves your chances of being approved.

  • Always pay your debts on time to show you’re reliable. If you miss a payment, address it as soon as you can.

  • Avoid making several credit applications close together, especially if you’re about to apply for a mortgage. This can give lenders the wrong impression.

by Andre Spiteri

Andre is a former lawyer turned financial writer. Andre has written this article especially for ClearScore.

ClearScore exists to make your finances simple.
We offer a free service where you can handle everything to do with credit in one place. In your ClearScore account, you can see your credit score and the full details of your credit report. Your credit cards, mortgages, mobile phone contracts, loans, overdrafts and utilities all on the record. Our goal is to make ClearScore as simple, calm and straightforward as possible. Money is stressful enough.