Every lender will check your credit score as part of the mortgage application process. No lender will skip your credit check, so make sure your credit history is in good order before applying for any loan.
Your credit score is a ‘percentage’ the lender assigns to you, which identifies you as either a ‘high risk borrower’ or a ‘low risk borrower’.
The percentage is a calculation based on a combination of your payment history, your current debts owed, the length of your credit history, and the types of credit you have used.
Each lender has their own calculation method, which they do not publicly disclose in detail.
The higher your credit score is, the better. This is because lenders classify you as a ‘lower risk borrower’, so in theory, they are more likely to approve your loan.
Some people have a good credit score because they historically pay their debts on time. Whilst, others have a bad credit score due to repeatedly failing to pay their debts on time, or at all.
Other people, particularly young people entering the workforce, or people who have never borrowed money, have no credit score.
Can you get a mortgage if you have no credit score?
It’s possible, but your option of lenders will be very limited. And sometimes you get charged a higher interest rate, which means your mortgage repayments will be more expensive.
How to easily build your credit score
If you have no credit score, you could apply for a mortgage with a non-high street lender, or speak with a mortgage broker.
However, I think it’s better to take the time (at least six months) to build your credit score. This is because you will be eligible for different types of mortgages with more lenders if you have a credit history.
Though it’s tempting sign up with any lender who offers you a loan, it’s important you look for the lowest interest rate to keep your monthly mortgage repayments at a minimal.
Below are some easy techniques to help you build your credit score almost effortlessly:
- Sign up for a yearly phone plan, but make sure you always pay your bill on time.
- Sign up for a credit card with a low limit. My first credit card had a $500 limit. Pay your monthly phone bill and other small expenses with this card to grow your credit history. Cancel the credit card after you have purchased your property.
- Do not apply for a NEW credit card to pay the debt on an OLD credit card. This does not improve your credit history even if the new credit card company offers you a one year interest-free period. Lenders will see that you simply ‘moving’ an existing debt around.
- Get your employer to pay your salary into your bank account. This shows that you have a stable income, so are capable of repaying a mortgage loan.
- Pay your university or college debts on time. You will be asked about your education debts in the application process.
- Always pay your taxes; you won’t get a mortgage if you avoid your taxes.
Remember, what the lender will assess is your ability to pay your debts, no matter how large or small, on time.
Check your credit score for free online
After you have built your credit history for a minimum of six months, you can check your credit score for free online. There are many companies who offer this service; simply Google ‘free credit check’.
Your credit report will include: debts you currently owe; types of credit you have historically applied for, including those which have been declined; a listing of defaulted payments or bankruptcy; and, most importantly, your actual credit score.
It’s advisable that you download your credit report before speaking with a lender or a mortgage broker. There could be a debt which, unbeknownst to you, is currently under-paid, or there could be an error in your report.
Do not apply for too much credit at one time
It’s not good to apply for multiple mortgage loans in a short period. Apply for one loan at a time. If your application is declined, wait a few weeks before making another application.
All your declined loan applications will be listed on your credit report. Multiple loan rejections will not only decrease your credit score, but make more lenders question whether you are a high risk borrower.
And don’t assume that your bank will give you a mortgage loan because you have been a long-term loyal customer.
I have been a customer of my high street bank for over five years, yet they declined my mortgage application because of my expat status. The advisor did not disclose this rule to me during the entire application process; he wasted a lot of my time.
In conclusion, building your credit score is very easy. What’s hard for many people is maintaining a good credit history. This means paying all your debts on time, always.
So, have you got any tips on improving your credit score?
Please note, though I own a few properties, I am not a legal, financial or professional property expert. I’ve written this post to share my personal experiences and would love to hear your opinions and views.
Sign up for weekly property investment tips.