We’ve all heard consumer advice that’s repeated so often it almost becomes cliché. So, every Friday the Money team will get to the bottom of a different “fact” and decide whether it’s a myth or must.
This week it is…
‘You can’t get a mortgage with a bad credit rating’
Just how important is keeping on top of your credit score when it comes to buying a home?
For this one, we’ve got the help of Emma Steeley, chief executive at borrowing platform Aro.
“The honest answer is that a bad credit rating can stop you from getting a mortgage, and a poor rating can throw some serious hurdles in your path,” Emma says.
“Despite this, it’s not the end of the road if your credit rating isn’t as rosy as you’d like it to be.”
What counts as a bad credit score?
“In the worst-case scenario, this will likely mean you’ve defaulted on or missed payments, and debt has been escalated to the stage where legal action has been initiated,” Emma says.
An applicant left with a credit score below 325 is considered “poor” or even “very poor” by Equifax.
A game of risk for lenders
Before we talk about what your credit score will do to an offer rate, it’s important to understand the impact that the loan-to-value (LTV) ratio can have on this too, as it heavily influences the interest rate offered by lenders.
Your LTV ratio is used by lenders to decide how risky it is to lend you the money to buy your home. It compares how much of the property you will own – ie, how much deposit you can put down in relation to the property’s value – to how much they will need to lend to you to make up the difference.
“The lower your LTV ratio, the better the mortgage rate you’re likely to be offered – the higher the LTV, the higher the risk for the lender,” Emma says.
“A higher credit score can help mitigate the impact of a high LTV, potentially resulting in a more favourable interest rate.”
What to do if you have a poor credit score
The obvious answer here is to try to improve your credit score, by building your file with credit builder loans and/or secured cards.
“While the options may be limited and less favourable for those with ‘poor’ credit scores, they do exist,” Emma says.
Those are usually longer or more expensive deals, however.
The good news is most lenders don’t solely use credit scores as a measure of creditworthiness.
“Best practice will see lenders using a blended scorecard, that overlays behavioural data and back book financial performance with credit data to get a much more accurate assessment of an individual’s payback ability,” Emma says.
However, for people with a “very poor” rating (below 226, according to Equifax), the number of offers you are likely to receive shrinks to almost zero.
Myth or must?
It’s undeniable that a good credit score gives you more flexibility when it comes to getting a mortgage.
“Importantly, credit scores can be improved,” Emma says.
“Those who take a proactive approach to managing their finances and understand how to rebuild their credit score will find themselves presented with a wider array of loan options.”
A good credit score is a money must.
Source: Money latest: American Express announces two big changes to credit card
