If someone asks you to loan them a significant amount of money, it’s natural that you’ll want the reassurance that they’re in the position to pay you back. Lenders have the same mindset when it comes to assessing whether or not to approve you for a home loan.
It’s still entirely possible to get a home loan with a bad credit score, and there are plenty of ways you can improve your credit too. We’ll also discuss how your credit score impacts what lenders are willing to loan to you, and what it means to have a good credit score.
What is your credit score?
A credit score, sometimes referred to as a credit rating, is a three-digit numerical representation of how reliable you are when it comes to borrowing money and paying it back. The higher your score, the more creditworthy you will be in the eyes of the lender, increasing your likelihood of the loan getting approved, whether it's a mortgage, loan, or a credit card.
Factors that impact your credit score
In essence, your credit score reflects your financial track record. It’s determined using your credit report, comprising data on how you manage your bank accounts, electoral register information, bankruptcy history, and a record of all credit (mortgages, loans, overdrafts, etc.) that you’ve had over the past six years.
The impact of your credit score on mortgage applications
The ideal credit score that you’ll need to get your home loan approved varies from lender to lender. A low credit score doesn't always signify poor credit management, either - it may be due to a lack of credit history. If you've never taken out a loan or cleared an overdraft, your score may be low due to the absence of a reliable repayment history.
Can I get a mortgage with a low credit score?
As previously mentioned, you still have a chance of getting your home loan approved with a low credit score - it just may be that your application takes longer to be processed compared to someone with a higher score.
To boost your chances of securing a mortgage with a less-than-ideal credit score, it’s recommended that you build up your credit as soon as you can to prove to lenders that you’re financially responsible. You can boost your credit score in a number of ways:
Settle outstanding debts
Ensure that all your bills are paid on time
Cancel any inactive bank accounts
Ensure you're registered on the electoral roll
Scrutinise your credit report for any discrepancies or errors.
Improving your credit
If your credit score is low or non-existent, it's wise to bolster it before applying for a mortgage. As well as the above actions, it’s good practice to avoid payday loans and ‘pay-in-3’ services, as these can adversely impact your credit score. It may be worth opening a joint account with a partner if you’re cohabiting, particularly if one of you has a good credit score and the other could benefit from an improved score.
Leveraging broker expertise
Regardless of your credit status, there are many pathways to achieving your dreams of homeownership.
Speaking to a mortgage broker before you’ve even taken the first steps on your mortgage journey is highly recommended. While they cannot provide financial advice, they can offer insights into mortgage options that align with your credit score. Reach out to us for more information on how we can help you find the right mortgage deal for your needs.