How to get your credit file mortgage-ready before buying a home - Andrew Milnes
Whether you’re a first time buyer or a seasoned homeowner, don’t be frightened of credit.
Used sensibly, it isn’t a bad thing - it’s actually one of the few ways a lender can see how you manage repaying what you owe.
You may be surprised to find that having no credit history at all can work against you. Take a first time buyer still living with their parents - with no car loan, credit card, or phone contract in their own name, they might assume they’re in the clear.
On paper, this might look like a clean slate, but to a lender it’s a blank one. With no repayment history, there’s little to show how this buyer handles regular commitments.
If you do have credit, use it in the way it’s intended. That means clearing the balance every month so you aren’t paying interest.
Some people take a card with a limit of a couple of hundred pounds, put their petrol on it, and pay it off in full each month. Done consistently, and only if you can comfortably afford to, it builds a record of regular, reliable repayment.
The principle is simple: pay on time, every month, and don’t max it out. Overusing credit can affect an application. Many lenders look closely at your debt-to-income ratio, which compares what you owe with what you earn.
Take someone on a £60,000 salary with a £50,000 car on finance. That ratio is high and it could limit how much a lender is willing to offer.
Compare that with someone earning £50,000 with £1,000 on a credit card, where the ratio is low and unlikely to raise concerns. As long as your borrowing sits within a lender’s parameters, it’s rarely a major issue, but heavy usage will be looked at carefully.
Many people overlook that lenders consider the credit available to you, not just what you’ve used.
Imagine having four credit cards, each with a £10,000 limit, none of which you touch. A lender can see that, shortly after completing on your home, you could, in theory, borrow £40,000. Even if you’ve no intention of doing so, that potential is taken into account.
It’s worth asking whether you really need every card you hold, and considering closing any you don’t use. However, be mindful that closing accounts can affect your credit file in different ways.
This is why it’s so important for a mortgage adviser to review your credit file before you make any decisions. They’ll know what a lender is likely to see and how it may be viewed.
Don’t assume that a history of borrowing lots of money makes you an ideal customer, either. Lenders look at the bigger picture, and a heavy borrowing record isn’t automatically a plus.
If you’re thinking about buying or moving in the next 12 months, now’s a good time to get your credit file in shape. Remember, a little credit, used and maintained well, can help.
There are several credit reference agencies, and different lenders use different ones, so it’s worth checking your file with more than one.
Your credit score is a snapshot of how your file looks, but lenders also run their own checks, so a good score with one agency isn’t a guaranteed approval.
Andrew Milnes is head of the Mortgage Advice Bureau, Bingley, 01274 891312