Mortgage Readiness: Boosting Credit and Tailoring Applications

Property Buyers
June 27, 2023

Stepping onto the property ladder or moving up requires a financial commitment and careful preparation, especially when applying for a mortgage. Here, Farrell Heyworth uncover the process of optimising your credit score and tailoring your mortgage application to your employment status.

Part 1: Perfecting Your Credit Score

Before lenders assess your employment status or income, they will examine your credit score. Here's how you can boost it:

1.1 Review your credit report regularly: Obtain your annual free report from credit reference agencies such as Experian or Equifax, and check for errors that might drag your score down. If you spot inaccuracies, contact the agency and the creditor to have them corrected.

1.2 Establish a history of prompt payments: Demonstrating a consistent record of paying bills on time can significantly improve your credit score. Consider setting up direct debits to ensure you get all the payment deadlines.

1.3 Minimise your debt: Your credit utilisation ratio – the percentage of available credit that you're using – plays a vital role in determining your score. Aim to use less than 30% of your available credit and pay off outstanding balances where possible.

1.4 Limit hard inquiries: Each time you apply for a credit card or loan, the lender performs a hard inquiry, which can lower your score. Space out your credit applications and only apply for credit you're confident you'll receive.

1.5 Register on the electoral roll: Lenders use the electoral roll to confirm your identity and address, so make sure your details are up to date.

Part 2: Mortgage Application for Employed Individuals

Employed applicants usually find the mortgage process straightforward, but there are ways to make your application more appealing to lenders:

2.1 Stability in employment: Lenders favour applicants who've been with the same employer for an extended period, typically at least six months to a year.

2.2 Income documentation: Be prepared to present your last three months’ payslips, a P60 form from your employer, and three to six months’ worth of bank statements to evidence your income and expenditure.

2.3 Debt-to-income ratio: This is a crucial factor for lenders. It's the percentage of your income that goes towards paying debts. The lower your ratio, the more likely lenders will view you as a safe bet.

Part 3: Mortgage Application for Self-Employed Individuals

Self-employed borrowers may face additional scrutiny, but the following steps can smooth the way:

3.1 Business financials: Lenders typically ask for two to three years' worth of accounts or tax returns. Engage a certified or chartered accountant to prepare these to ensure they meet lenders' standards.

3.2 Proof of income: You can provide an SA302 form or a tax year overview (issued by HMRC) for the past two to three years.

3.3 Income consistency: If your income fluctuates, lenders may use your average income over the past two to three years. If your income has gone down, they might base their decision on your latest year's income.

Part 4: Mortgage Application for Company Directors

As a company director, your income might be complex, but there are ways to navigate the application process:

4.1 Salary and dividends: Lenders consider both these forms of income. Keep clear records and have evidence available.

4.2 Company financial health: If you own more than 20-25% of a business, lenders may want to assess the business's accounts. They typically look favourably at profitable businesses with steady or growing revenue.

4.3 Accountant’s certification: A certified or chartered accountant can provide a reference to vouch for your personal income and the company's financial health.

Obtaining a mortgage is a significant financial decision, and preparation is key. From cleaning up your credit score to understanding the specific requirements based on your employment status, each step is crucial. Remember, every lender has different criteria, so do your research and consider seeking advice from a mortgage broker or financial adviser to ensure you present the best possible application.

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