What a Mortgage Lender looks for

Despite the caring, sharing image that Mortgage Lenders like to portray in their advertising, they are interested in only three things about your mortgage application.

• How have the applicants conducted their finances in the past
• Do their present circumstances fit lending criteria
• If it all goes pear shaped, can they recover all, or most of their money quickly.   

How have the applicants conducted their finances in the past? 

In EVERY CASE, mortgage lenders will check your credit reference file. 

The file records your address history and credit history over the previous six years. Details of your payments to loans and credit cards every month for the last 12 months are recorded, as are the amounts outstanding on credit cards and loans. They also record the credit limits on your cards, and all credit that has been applied for.

I sometimes meet first time buyers who are extremely financially organised and disciplined. They have truly taken on board the lessons of a previous generation, and do not buy things on credit. I applaud them, it's rare now to find people who have not fallen for the "buy now, pay later" ideas pushed by the banks. But it causes them a hugh problem as far as credit scoring is concerned. They have not demonstrated that then can borrow money and consistantly meet their debt repayments. This makes them a credit risk as far as a lender is concerned, and will probably result in a low credit score. My advice to them is to obtain a credit card, use it to pay for petrol, or groceries, and set up a direct debit to pay off the full balance each month. Voila, an improved credit rating, after a few months.   

All lenders ask for a complete address history for the last 3 years. If you have been on the electoral role, this information will be confirmed on your credit reference file. If you haven't, you may be required to provide PROOF of your address history in the form of utility bills or bank statements. Occasionally I've seen mortgages declined because the individual could not provide this proof.

For more information on credit scoring and credit files click here

Do their present circumstances fit lending criteria? 

Broadly, different lenders have different criteria for such things as length of time in current job, minimum income, minimum loan, maximum term of loan etc. The usual decider is whether applicants fit their income multiples for the proposed loan

If it all goes pear shaped, can they recover all, or most of their money quickly?

Understandably, lenders always have one eye on what happens when things go wrong. Figures published by the DCA (Department for Constitutional Affairs) show that in the 3 months to June 2005, 28,476 orders were made by county courts against individuals defaulting on their mortgage repayments. During the first six months of 2005, there were 4,640 homes repossessed according to the Council of Mortgage Lenders.

Every default and reposession causes administrative, and ultimately, financial problems for a lender. They can also involve the lender in some very bad publicity, as many reposessions are caused by unfortunate events:

• death
• divorce
• illness
• unemployment
• reduction of income - perhaps by loss of regular overtime or a job change

As the figures above show, lenders will go to court if borrowers default. This is hardly surprising when you consider that you consider that death, illness, and unemployment can be insured against. Ultimately, if the defaulting borrow will not voluntarily sell their property to settle their debt, the lender will seek to force them to do so.

Credit Scoring

Lenders split into two distinct camps at the application stage:

• Those who credit score
• Those who do not credit score, and assess each application manually

Credit scoring involves the applicants answering a series of questions, the answers to the questions attract a score, weighted to suit the lenders risk profile.

An application will either FAIL, credit scoring, or PASS credit scoring. Some lenders sub-divide passes into High, medium and low score passes.

If the application fails credit scoring, that's the end of the road for applications to THAT PARTICULAR LENDER. It can be worth making an application to another lender, as credit scoring differs between lenders. However, if there is something on your CREDIT RECORD that would obviously result in a fail, for example, a recently registered CCJ for £897, it's likely that only an application to an ADVERSE CREDIT LENDER will succeed.

How do you know if you will pass credit scoring?  

In short you don't. Lenders don't disclose how their credit scoring works. The only way to know for certain is to apply. Any mortgage broker should be able to obtain a decision in principle for you, from a suitable lender, on the same day.  

You are very likely to pass credit scoring if you meet the following criteria:

• You are registered on the Electoral Roll, and have been so for the last three years or more.
• You have demonstrated that you can consistantly meet credit payments.
• You have no CCJ's or Defaults registered in the last six years.
• You have not been bankrupt.

The most important of these is the information on your credit file about your existing and past credit.

Passing credit scoring DOES NOT neccessarily mean that you will get the mortgage you require, or any mortgage offer for that matter. It's merely a device that lenders use to weed out applicants that they DEFINITELY WILL NOT accept a mortgage application from.