How does bad credit affect your mortgage chances?

If you’re applying for a mortgage, one of the first things a lender will do is check your credit score. Your score can determine whether they approve your mortgage, so it’s good to know why you might be declined and what to do if you’re concerned about being approved.

A credit score tells a lender about how you handle credit – money you've borrowed – and how you manage your bills. Scores range from ‘excellent’ to ‘poor’. A low credit score can raise a red flag, which could result in a loan like a mortgage application being held up or even denied. This is because it suggests that you might struggle to pay it back.

A low credit score can happen for several reasons. It can even come about because you've never borrowed money before, so you don't have a credit history. This makes it trickier for credit reference agencies to give you a rating.

Why is it harder to get a mortgage with poor credit?

A mortgage is usually the largest amount of money you'll be loaned in your lifetime. So when you apply for one and your credit score isn’t good, it poses a bigger risk to the lender. A low credit score means the lender may need more time to dig into your history to feel confident that you'll be able to meet your mortgage repayments.

Even someone with a good score may need to wait from two to six weeks for their mortgage approval, because lenders will be looking at finances beyond just a credit score. They'll check your employment history, for example.

Can I still get a mortgage with poor credit?

It’s not impossible to get a mortgage with a credit score that isn’t good because each application is unique. For instance, the issue affecting your score could be a one-off missed bill rather than a more serious issue, such as a series of missed payments on a loan in the past.

If you want to see where you stand, you could apply for a mortgage in principle. This is a shorter process where the lender usually carries out a ‘soft’ credit check, which doesn’t go into as much detail. It’s not a binding offer and it shouldn't show up on your credit history either, depending on the lender.

Some mortgage lenders offer products specifically for people with poor credit – but these often come with higher interest rates and fees. The way to boost your chances of getting approved for a better mortgage deal is to improve your credit score and apply for one when you’re in a stronger position.

Jen’s story

Let’s pretend we have a friend called Jen. She’s in her mid-thirties and has a steady job. Jen tends to put a lot of her purchases on credit cards, opting to pay the minimum amount owed. But, she’s saved enough money over the years for a deposit on her first home. Jen's heard that her credit score will be taken into account when a lender considers her for a mortgage, so checks hers and sees it's ‘fair’ (which is low on the scale of what's considered good.)

This could be because:

• Jen missed a payment deadline on her credit card a few months ago
• She has two store credit cards in her name that she hasn’t used for over a year
• Jen isn't registered on the electoral roll

Jen cancels her store cards and puts herself on the electoral register. She also avoids maxing out her credit card and keeps up with her credit card payments – not just paying the minimum amount.

After working for six months to build up her credit score, Jen applies for a mortgage and is delighted to see her credit score is now 'very good' which puts her in a better position to get approved for a loan.

Improve your chances by boosting your credit score

There are ways to improve your credit score, from making sure you’re on the electoral roll to checking your credit report for any errors or signs of fraud. It’s worth considering paying off outstanding loans and debt, and cancelling any unused credit cards and bank accounts in your name.

If you've been affected by something serious like defaulting on a loan, bankruptcy or a County Court Judgement it'll take time to rebuild your credit score. Even if you’re a few years away from thinking about a mortgage, getting into the mindset of improving your score could help form good habits when it comes to your money.