The Financial Conduct Authority has redefined mortgage rules. It is a nightmare not only for the homebuyers but also for the lenders. With stricter rules, it takes more time to review the applications and process a mortgage loan. However, the most key player of mortgage applications, credit report, has been left untouched. The effect of credit report will remain unchanged in coming years, even if the authorities revise the rules.
Therefore, have a look on the effect of credit report on mortgage to see how you can improve the chances of approval of your mortgage application, now or in future.
Lenders look out for the inquiries in your credit report like outstanding debt and unpaid bills. If you have poor credit score then chances are that you will get a mortgage on high interest. Applicants with good credit score can get mortgage on low interest rate. Does interest rate affect your repayments that hard, you ask?
Consider that you obtained a loan. The principal of this loan is £200,000. You have good–excellent credit score, which means that you can obtain a mortgage at 4% APR. The loan is approved for 30-year fixed interest. At the rate of 4% APR, your monthly mortgage and interest repayment would be £954.83. However, if you have low credit score then you may get a mortgage at high interest. Consider that your interest is 5%. Then your monthly mortgage and interest repayment would be £1,074. Remember that if you have poor credit score, your interest rate may increase to 7–8% along with high percentage of down payment.
Lenders Are Scared of These Ingredients in your Credit Report
The lenders evaluate your credit history, loans, repayments, bills, and more. However, a few ingredients of your credit report could be scarier than other ingredients.
- People believe that they should choose a short sale over foreclosure to avoid its impact on the credit report. However, a short sale is similar to foreclosure. It means that you sold out your equity at lower price for some reason.
- The lenders are often worried about their customers taking someone else’s burden on their shoulders. This happens when you co-sign a loan with someone or become the guarantor of an unreliable person. This may put you in trouble.
- The creditors make profits when your balance is higher than the equity. This is why, the lenders suggest making maximum payments instead of minimum.
- Do you often take out cash advances to pay bills? Do you take out payday loans and other short-term loans? It seems that you are financially stressed, and it may frighten your lender.
Plan your mortgage application and start cleaning up your credit report at least six months prior to the application. Automate your credit cards and pay bills and other loan instalment punctually. Save at least 30% of your income and discuss foreclosure, short sale, or bankruptcy with a financial advisor. Evaluate your income to debt ratio and save as much as possible for down payment. Research the market and find the best lenders with most flexible options.