The mortgage lender Kensington recently conducted a survey of brokers to establish where they felt problems arise when placing a large mortgage case. The results showed that the single biggest factor is lenders applying tighter credit scores to that type of borrower.
So what is a credit score and what’s the impact? It stands to reason that lenders will check a borrowers’ credit record with a credit reference agency in order to confirm the debts that customer has and see how they are being managed. Credit scoring goes beyond a simple credit check and will affect all applicants, not just those seeking a large loan.
Many lenders will use credit scoring as part of their application process in deciding how much they can lend and whether they can lend at all. A borrower's responses to the questions on their mortgage application will help build an overall picture, often based on the experience of the lender.
Simple things like the number of different addresses in the last three years could affect the level of a borrower's credit score. As mortgage lenders have different ways of interpreting the same data, it is possible for lenders to come up with different scores for the same customer. That will have an impact on what they would be prepared to lend, with those customers that score highly being more likely to be offered a larger mortgage amount than someone coming in with a low score.
Although lenders publish their lending criteria and make any changes to criteria clear they will not be as open with their credit scoring models. Tweaking of credit scoring can therefore be used to shape the type of client profile that the lender will find acceptable. For example a much higher score will be required for a purchaser with only a small deposit, compared to one with bags of equity.
This can be frustrating for some borrowers but there are lenders that now make a virtue out of the fact that they do not credit score and instead rely on common sense approach to underwriting, in an effort to avoid the “computer says no” result that scoring can result in.