In his previous post, Dean Morrison, director of the Athome group, revealed the inner workings of why banks won’t give you a mortgage. In this article, he shows you exactly what you can do to get one.
It is not merely enough for you to know that you are of good character with a good credit record when you make a mortgage application. You need to actively assess your relevant “data” and understand how closely it matches what the lender’s algorithm wants. You need to get into this mindset.
So, what do we need to do to make us the perfect match for a lender’s computer? In the following paragraphs, I will outline what mortgage bank algorithms typically look at.
Before we start, it needs to be said that there is no such thing as a “credit score”. It doesn’t exist. “Credit Scores” were invented by CRAs (Credit Reference Agencies), such as Equifax and Experian, in order to sell their value-added services. Don’t get fooled and don’t waste your money. Remember, all that matters are the facts (or data) contained in your credit file and whether it matches the data that the algorithm is looking for.
7 key criteria of a lender’s algorithm
1.) Enrol to vote
According to the banks, someone who has enrolled to vote is less likely to be delinquent on a credit account. To the logical person, it makes no sense that the mere act of enrolling to vote should have an impact on how responsible for credit you are. The algorithm likes it when you are on the electoral roll.
Maybe you don’t vote? Disillusioned with politics? So what! It’s irrelevant. Remember, all they care about is matching your data (“enrolled to vote” or “not enrolled to vote”) with the millions of other customers that have been through its system and the correlation is that those who are enrolled to vote are less likely to be a credit risk. Go figure.
2.) Don’t move house
The algorithm loves stability. It loves you when you stay at the same address for a long time. Those that move frequently are more prone to credit issues. This does make a little sense but, unfortunately, brings up a lot of false positives because some of the most successful people are those that relocate often. If you are one who constantly moves houses or flats, (like many in London) then you need to be aware that this is seen as a negative by mortgage lenders.
3.) Get a landline
I don’t even know the number of my own home phone. I don’t even think I have a handset, and I can’t remember the last time I made a call from a landline but I do have one. I do because, again, the algorithm finds something very positive about those who have landlines as they seem to be similar to (or correlate well with) those customers that have historically been less of a risk.
4.) Be boring and stick with the same bank account
Few of us think of our current account as being a credit tool, but as most current accounts allow for over-drawing they are legally considered to be credit accounts. So usage can affect your credit file. Don’t change current accounts willy nilly. Even if a new bank offers you cash back or other incentives, resist. Stick with the same account for years. Boring equals stability. Boring gets you credit. Boring makes the algorithm really like you.
5.) Don’t be a credit tart
Every time you apply for a credit account, the lender does a search on your credit file. More often than not, this leaves a “hard footprint” on your credit file. A hard footprint is an indicator that a lender has searched for your file and every other lender searching your file subsequently can see this. Lenders (or more accurately, algorithms) don’t like seeing other lenders searching your file as it correlates with those who have previously submitted fraudulent applications. So don’t risk it, space all credit applications (even mobile phone applications) a few months apart to be safe.
6.) Get a credit card
How you use a credit card is a great indicator of your relationship with credit. Lenders make money from you by giving you credit. The ideal customer to a lender is someone who accepts an appropriate level of credit, uses this credit, and pays off this credit each month on time. If you don’t like credit cards, then you need to learn to love them. They are your tool to a good credit file. They are a means to an end, with that end being establishing a good credit file and not necessarily establishing an expensive lifestyle. The correlation between those who are responsible users of credit cards and those who are less of a credit risk is easier to understand. Although the problem can generate a false positive on those who never use credit cards (because you don’t need to) being wrongly correlated with those who are a credit risk.
If you don’t use credit cards because you don’t trust yourself, then how can you expect a bank to trust you with a mortgage? Don’t let the algorithm screen you out. Go and apply for a credit card, use it, pay it off at the end of the month. Rinse and repeat. Then, after four or more months apply for another card as you remember not to have too many credit applications at the same time.
7.) Always pay on time
Pay your credit accounts on time ALWAYS. If you have a dispute, pay the bill first and argue later. Never, ever allow your account to be delinquent by even a penny. This will flag up on your credit file and you will be shut out of 99 per cent of mortgages for years. Once that red flag is there it is almost impossible to remove. Make sure every credit account is on direct debit so you never put yourself in a position where you will be denied credit because you forgot to pay on time and were a few days late.
This is crucial.
Many applicants believe that they should have a good credit file because they have always paid their credit accounts on time. Well, the news is that lenders expect this at the very minimum. You get no positive points for paying on time but you get totally screened out if you ever miss a payment.
How do you monitor your credit file? Simple, subscribe to one or all of the three CRAs to keep an active eye on your progress and to identify areas of concern or mistakes. Sometimes an old or dormant utility account that has an incorrect entry may be the reason why you have been denied credit. Sometimes there is a problem with your address meaning that they can’t match you up with the electoral role. You should correct every and all mistake, aggressively.
Sometimes it can take a few months to prepare yourself, sometimes you won’t achieve optimal credit algorithm attractiveness for many years. Wherever you are on this journey, you need to start planning and doing now. More than that, you need to start thinking like the algorithm.
Finally, understand that your credit file is only one aspect in which the lender assesses you. Your application and previous dealings with the lender are equally important. So rather than making that mortgage application thinking that it will be a breeze because you have a good income and track record, make an effort to get into the right “mindset” of an investor. Look at yourself in the same way the lender’s algorithm will. You may not have control over all aspects of your data but at least there will be no surprises.
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