Anyone who wants to apply for a mortgage right now will know that it's not easy. Coronavirus has made the process of applying longer, while lenders are now more careful than ever about who they will lend to. You probably already know that having a healthy credit score is essential to a successful mortgage application, but how can it be achieved? Personal finance experts from Ocean Finance weigh in with the top tips for making sure your application is a success – that you may not have heard about.
1. Make sure your name is on all household bills
If you share a rental, it can be tempting to let someone else put their name down on the utility bills and just pay them back. If you want a mortgage, avoid doing this: bills with your name and address on them are proof that you pay them on time. This especially applies to the rent itself – never move into a house share without your name being on the contract. Before applying for a mortgage, ask your landlord for a letter confirming that you pay on time.
In the UK? You can ask your landlord to put you on the Rental Exchange Initiative to prove you pay on time.
2. Check your credit report for errors
Don't underestimate the potential consequences of out-of-date addresses and phone numbers showing up on your credit report – they can negatively affect the outcome of your mortgage application. Once you've ordered your report, check it thoroughly; if you have spotted errors, you will need to contact your credit issuer directly to correct them. If you have multiple active credit accounts, you will need to make sure the address and other contact detail match on all of them.
3. Reduce your debt – even if it means going into your savings
Quite simply, the less debt you have, the better your chances of securing a mortgage – even if this means using your savings to pay it off. It's a common misconception that it's better to have cash savings even though you have an outstanding credit balance. Anything that's accumulating interest is worse for your finances overall – and for getting a mortgage – than not having savings. So, if you have to, use your savings to pay off what your owe and make a fresh start.
4. Keep a fixed address for as long as you can
A fixed address for over three years looks more favorable on mortgage applications; at any rate, you should wait at least one year at the same address before applying. Frequent moving can be perceived as an attempt to move away from unpaid debt; it can also suggest an unstable employment situation, so if you can stay in one place for a good while, it will pay off when applying.
5. Disassociate yourself from previous financial partners
If you are in the process of divorcing, you must wait until you get your final divorce decree papers before applying for a mortgage; until then, your finances, including credit history, will be linked to your ex-partners.
You should also think carefully before linking your finances to someone else's in the future; while asking someone about their credit score before getting married isn't the most romantic thing, getting a general idea of how well they manage their finances is a good idea before legally binding yourselves together.
6. Avoid using overdrafts and make sure all recurring payments are on time
An overdraft, as far as your credit report is concerned, is another form of borrowing, even if it's free, so avoid going into an overdraft if at all possible. If you're having trouble with cash flow, then getting a zero-per-cent credit card may be the better option, provided that you can make the minimum repayments and know when the zero-per-cent offer will end.
Any late or missed payments, whether it's on your credit card or your other accounts will impact on your credit score – and your ability to get a mortgage. Use calendar reminders on your phone, if you need to, to stay on top of your recurring payments.
7. Don't withdraw money from your credit card
The golden rule of a healthy credit score is: if it comes with interest, it's best avoided. And withdrawing cash from your credit card account will attract interest, so don't do it, unless in an absolute emergency.
8. Repay more than the minimum on your credit card
In fact, repaying the total amount owed each month will give you the best credit score; if you're not quite managing the whole amount every month, at least repay the maximum you can. Making two or more repayments each month is also looked on favorably by lenders, so repaying little and often is a good strategy if you're repaying a large chunk of debt.
As a rule, avoid using more than 15 per cent of your credit limit at any given time, and if you're using more than 25 per cent, you need to cut down on your spending. If you're regularly going over 25 per cent, look through your statements to identify areas where you can cut down on spending.
9. Bad credit score? Wait at least six months
There's no way around a bad credit score when applying for a mortgage; if you're below roughly 620 or so, you are likely to get turned down, which will in turn harm your credit score even more. The best thing to do in this situation is to hold off applying for a mortgage and rebuild your credit score (by using all of the above tips). It's best to wait a whole year, but six months is the absolute minimum before trying again for a mortgage.
10. Consult a mortgage broker
If your credit score is healthy, but you have other complicating circumstances – for example, you're self employed – you need to get in touch with a mortgage broker. They won't just offer you mortgages to apply for, but they'll actually look into your individual finances and take you through what you need to do be successful in your application. They'll also be honest with you if now if not the time for you to apply.