How do lenders use your credit score for mortgage applications?

Your credit score is used to give mortgage lenders an idea of how you’ve managed credit in the past. The higher your credit score is, the more options you’ll have when it comes to getting approved for a mortgage. But it’s just one of the things mortgage lenders consider when you apply.

Lenders will also carry out an affordability assessment. The amount that you earn forms the basis for lenders to determine how much you’ll have left each month to pay towards your mortgage, as well as things like existing credit payments.

You can read more about credit scores here.

How your credit score is used: how are personal loan applications different from mortgages?

When applying for certain kinds of credit, such as a personal loan, or a credit card, your credit score is often the main thing a lender will use to decide whether to offer you credit, and the rate they will offer. It has a major influence on how much you can borrow.

Lenders need to determine whether you’ll be able to maintain payments on your loan. And your credit rating provides them with the strongest indication of this.

A higher credit score means you’ve shown a good track record of keeping your finances in order and maintaining loan and credit repayments, so lenders will see you as a lower risk.

Lenders stand to lose the outstanding balance of personal loans or credit card debts if borrowers are unable to repay. This is called ‘unsecured’ lending, and rates are generally higher than mortgages, even though the loan amounts tend to be smaller, and the terms shorter.

A mortgage is very different to a personal loan or credit card, because the loan is secured against a property. Therefore, if a borrower can no longer meet the repayments, the lender can sell the property to repay the outstanding debt. And this is why mortgages have lower interest rates than personal loans.

But lenders really don’t want to be in the position of having to take possession of a property, and there is lots of regulation and good practice within the industry to protect borrowers, to make sure this is always a last resort.

Our mortgage expert, Matt Smith, says: “If you ever find yourself in a position where you feel you’re unable to make your mortgage payments, the best thing to do is to speak to your lender, as they’ll have a range of options available to help you.”

You can also find advice on sites such as StepChange, Citizens Advice and MoneyHelper.

Why do I need a good credit score to get a mortgage?

Similar to personal loan providers, your credit score is very important to a mortgage lender, as you’ll need to pass the lender’s credit assessment to get an offer. However, when it comes to getting a mortgage, your score isn’t the main factor in determining how much you can borrow, and it also doesn’t really impact the interest rate you’re offered.

The amount you can borrow is determined by an affordability assessment. And your interest rate is determined by the amount of deposit you have, otherwise known as loan-to-value (LTV). LTV is expressed as a percentage, and it reflects the size of the mortgage you need as a proportion of the value of the home you want to buy. The bigger the deposit you have, the lower the LTV, and vice-versa.

How your credit score, size of deposit and loan-to-value impact a lender’s assessment

Given that a mortgage is a loan against a property, the size of your deposit has a big impact on the risks that a lender considers.

The more deposit you put down, the less likely the lender is to lose money. For example, if you put down a 5% deposit on your home, the lender provides the remaining 95% with the mortgage. But if you had paid a 15% deposit and the lender provided an 85% loan, the likelihood of the lender losing money, should they have to sell the property, is much lower.

This is why a 95% mortgage comes with a higher mortgage interest rate than a mortgage at 85%.

Not only does the amount of deposit you put down determine your mortgage interest rate, it also has a direct impact on a lender’s credit assessment. Lenders each have criteria in place which effectively sets the minimum credit score they’ll accept across different loan sizes and LTV ratios.

In short, the higher your credit score is, the more options you’ll have when it comes to getting a mortgage.

Matt says: “While a mortgage lender will use your credit score to gauge whether you’re likely to maintain your monthly payments, the size of your deposit and your LTV ratio will be the determining factors of whether to lend to you, and at what rate.”

“For first-time buyers, it’s very important to consider their credit score as they get ready to buy a home. It’s particularly important for this group as usually they need higher LTV ratios, and have smaller deposits,” he adds.

I have an excellent credit rating. Why was my mortgage application declined?

Although a high credit score is a good indicator of how likely you are to meet your mortgage repayments, it’s not the only thing that’s considered when you’re applying for a mortgage.

Your income and expenditure form the basis of how much you can borrow. And there are other factors lenders need to consider when assessing your mortgage affordability. These assessments are detailed and can be complicated. You can find out how much you can borrow with a mortgage and read more about each stage of the process here.

What should I do if my mortgage application has been declined?

Receiving a mortgage decline decision for any reason can be frustrating, and if you’re declined because of your credit score, it’s not always easy to understand why. But there are things you can do.

Matt says: “If a lender has given you a credit decline, the lender may still accept an application from you at a lower loan-to-value ratio.

If the reason for the decline is mostly down to your credit score, and you’re able to increase the size of your deposit – reducing your loan-to-value – the same lender may accept you. That’s not always the case though, and bear in mind that other lenders will have different risk assessments, and different approaches.”

If you’re declined by a lender because of adverse credit, or county court judgements (CCJs) against you, that doesn’t mean you’re ruled out of getting a mortgage. There are lenders who can help you if you’re in this situation. You might want to get in contact with a mortgage broker, who’ll be able to advise you on the next steps.

These lenders often charge higher rates than high-street lenders, and are usually only available via brokers.