Credit Scoring
What is Credit Scoring ?
The majority of UK Mortgage Lenders now use credit scoring to decide whether to accept a mortgage application.
How the system works
The lenders use the large amount of data that they have accumulated, to devise mathematical models for assessing how much money they will lend to us. This data is inserted in the lenders credit scoring system. Points are awarded for the anwers to specific questions - typically they are looking for financial and lifestyle stability. The system is designed to approve lending which limits the risk to the lender. Lender risk is the risk of the borrower (mortgagee) making late payments, not making any payments, and ultimately the cost to repossess the property.
Major factors are:
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Loan to Value (LTV) requested - Clearly, the lender is at lower risk as the LTV percentage falls
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Affordbility - is income sufficient to make timely mortgage payments likely? Will existing credit commitments cause problems.
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Past credit record - has the applicant demonstrated the ability to make existing mortgage and other debt repayments on time.
Each mortgage lenders system will differ slightly according to their data and lending criteria. As a broker, this is noticable in that an application may fail credit scoring with one lender, yet pass with another.
The criteria, and scoring system are not disclosed by the lenders. If this information was known to the applicant, it could influence their answers to the questions asked.
The credit scoring result
Your application will either pass or fail credit scoring. If you pass, you get the mortgage, subject to valuation, and confirmation of the information supplied. Some lenders rate the credit score as
- High Pass
- Medium Pass
- Low Pass
- Fail
They will often apply a higher income multiple to a High Pass, than to a Medium or Low Pass. For example they may use an income multiple of 4 for a HIGH Pass, 3.5 for a medium pass, and 3 for a low pass. Fail, means they will not lend.
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