A couple of weeks ago we ran a blog on how the content of your credit report is of much greater importance than a credit score. In this week’s blog, we want to look at how mortgage lenders use the information contained within the credit report to assess applications via lender credit scoring. Mortgage lenders pull the data from one or more of the four UK credit reference agencies which collect and store personal financial data. As mentioned in previous blogs, these are Experian, Equifax, TransUnion and Crediva.
Data pulled from credit reference agencies is typically used to formulate a score via the bank’s own credit scoring system. The outcome of this will normally be a pass or fail meaning the application can or cannot proceed further. Some lenders also limit the maximum loan-to-value based on credit scoring too.
So what factors affect a lender’s internal credit scoring system?
Adverse credit is a major factor. The type, recency and value of any adverse credit all matters. Adverse credit usually starts with not maintaining monthly payments and falling into arrears. Arrears can occur on credit cards, utility bills, phone contracts, loans (including buy now pay later finance), car finances and mortgages. Persistent arrears can result in defaults, county court judgement (CCJs), individual voluntary arrangements (IVAs) and bankruptcy, amongst other consequences. Payday loans are viewed as adverse credit by prospective mortgage lenders too, regardless of whether all payments are maintained.
As well as adverse credit, other factors influence lenders internal credit scoring. Banks like to be able to clearly identify you at one address so make sure all your finances are registered to one place. Being registered on the electoral roll at this address helps too! Lenders often assess your debt-to-income ratio. This mainly relates to credit cards, loans and finance agreements. A high level of debt relative to your income can make things tricky, irrespective of whether you’re maintaining the necessary payments. Also, an excessive number of recent applications for credit which leave a “hard footprint” on your credit report can count against you. If it looks like you’re regularly applying to borrow money, which can naturally make lenders uncomfortable about lending you more.
Internal credit scoring is done when a mortgage in principle is submitted. The mortgage in principle is the precursor to a full mortgage application and involves credit and affordability checks. Credit checks at mortgage in principle stage almost always leave just a “soft footprint” on your credit report. This means they cannot be seen by other lenders and doing multiple soft checks won’t harm your credit score. A “hard footprint” is only left when the full mortgage application is submitted.
Because the internal credit scoring is done at the mortgage in principle stage, it is not something that should cause significant delay if it does fail. Mortgage in principle decisions are usually made instantaneously so a decline allows you to move swiftly on to the next potential lender.
A small minority of lenders choose not to operate an internal credit scoring system. These lenders will take a bespoke look at the credit report for each application they receive before making a decision on whether to lend. Obviously, this approach is more time consuming for the lender and it is therefore a method only really taken by specialist adverse credit lenders who generally only receive applications of that nature.
While an application may meet criteria, it can still fail the internal credit scoring process. Historic factors can accumulate to cause a credit score decline when the background calculations are run. As a broker, this is one of the areas of uncertainty that we must navigate. We can’t access the internal scoring system so cannot check before making an application. As stated, the internal credit scoring process is different with every lender. If you have been declined based on credit scoring with one bank, there is often someone else available and happy to lend, so don’t panic!