There's also the additional concern surrounding what happens if your loan application is declined off the back of the credit check; the very act of making an application for a mortgage, or any type of finance for that matter, can negatively impact your credit score further.
So if you’re already on thin ice where your credit file is concerned, is it worth the gamble to apply for a mortgage? Just how much does a mortgage application affect your credit, and how long should you wait between applications? This guide covers all you need to know.
What is a credit check?A credit check, or a ‘credit search’ is when a company looks at your credit report to get an understanding of your financial history.
This information allows mortgage lenders to assess how reliable you are at borrowing and repaying money, to determine whether they’re willing to consider lending to you.
Your credit report contains a number of details around your personal and financial circumstances, including:
- Your name.
- Your address.
- Details of anyone you’re financially linked to.
- Your borrowing history (including the types of debt, the date you opened each account, the credit limit or loan amount, and your account balance).
When you apply for a loan, or any other type of finance, there are two different types of searches which may be carried out on your credit report – a soft credit check and a hard credit check.
What’s the difference between a hard credit check and a soft credit check?First and foremost, it’s important to establish the difference between hard and soft credit checks. You’ll probably hear mention of both during the house buying process, but each affects your credit file differently.
Soft credit checks and your credit scoreA soft search doesn’t leave a visible footprint on your file, although it is recorded. Soft searches won’t be visible to other lenders and shouldn’t impact your credit score, and can be carried out multiple times without you worrying about the consequences.
Companies with the ability to make soft credit checks must be registered with the Credit Reference Agency (CRA), and, unlike a hard check, they don’t require your permission to make one. You may find yourself initiating them as you suss out mortgage deals and other financial products.
And why is that? Because every comparison site you look at, from car insurance to credit cards, does a soft search to show you the applicable offers. Some companies you’re already involved with may be running soft checks on you as we speak, so they can present you with their latest relevant offers.
Hard credit checks and your credit scoreOn the flip side of the coin is the hard credit check. If you’ve ever applied for finance of any kind, this is the type of search a lender will carry out on your credit report. A hard credit check can only be done with your express permission.
A hard check involves the lender or credit reference agency (CRA) revealing several personal details about the borrower, from confirming your address all the way through to telling them if you’ve had a direct debit bounce.
Any ‘negative marks’ to your credit report will stay on your record for a number of years, so if you’ve missed a loan payment, been issued with a CCJ or filed for bankruptcy in the past, this will all be flagged to potential lenders.
The main difference between a soft and hard credit check is that the latter leaves a footprint on your credit report which is visible to others lenders. They will also be able to find out whether you’ve been successful for previous credit applications.
How does a hard search impact your credit score?Having a single hard search carried out on your credit report isn’t a bad thing; it’s unavoidable if you want to be approved for a mortgage. Yes, it will unearth any instance of adverse on your file, but you should already have declared this sort of thing on your mortgage application.
You may see a small decrease to your credit score as a result of the check, and it will be visible on your report for around two years. Aside from that the impact is relatively small, especially if the inquiry occurred some time in the past.
On the other hand, if you receive a rejection and continue to submit more applications (i.e. are subject to further hard credit checks), particularly within a short space of time, this can be a death knell on your ability to get a mortgage and should be strongly avoided.
How long should I wait between mortgage applications after having one declined?It’s understood that a hard credit check is part and parcel of a credit application, and no one is going to penalise you for it.
But what happens if a second one is carried out later that same day? Chances are you’re still looking at options, so perhaps that’s not so bad. When do you draw the line? A third the next day? Three more that week? Another few a week later?
Add up all these hard searches, each of which is likely to represent an application for credit, and it builds up a picture of a person who is desperate to borrow money but keeps getting declined.
That picture is not one a lender wants to see. Desperation isn’t attractive to a business keen to see you as a responsible borrower, so it’s advisable to wait a few months if your first (or second, at a push) attempt is rejected.
The same is true with other forms of credit. If you plan to get a new credit card or a loan as well as your mortgage, you’re best off doing so at least six months before (or wait until six months after) you submit your application so there’s no crossover or interference.
Twiddling your thumbs between applications? You could use that time productively and seek advice from a broker, who can point you in the direction of lenders and mortgage products more suited to your circumstances and give you the best chances of approval.
How to avoid the impact of a hard credit searchThe only way to protect yourself from the effect multiple hard searches will have on your credit status is to prevent them from happening in the first place.
Remember, you will always be asked before a hard search is carried out, so simply say ‘no’ if you have reservations. It’s far better to back out of an unrealistic or mediocre mortgage offer than ruin your chances of a better one. That being said, you shouldn’t rule out credit checks altogether if you feel you’re being presented with a realistic offer.
The next piece of advice is simple (if easier said than done): be patient. Time is a huge factor in the credit world, as the weeks and months will lessen the significance of previous applications. It could also give you the opportunity to save a bit more towards a deposit.
How does a successful mortgage application impact your credit?Once your application has been accepted and shortly after getting a new mortgage, you can expect your credit to take a slight hit.
Given that a mortgage is probably going to be the largest loan you’ll ever take out, it makes sense that your new hefty debt obligation is reflected in your credit score. It shouldn’t decrease by much more than 50 points, and your score should begin to increase again after a few months when you’ve demonstrated your ability to repay.
In the months following getting a mortgage, it’s not advisable to apply for any other type of finance, to allow your credit score time to repair itself. It takes an average of five or six months for your score to climb back up - provided you keep up with your repayments and other credit commitments you may have.
Seek mortgage advice from a bad credit expertIf you've previously been declined a mortgage due to bad credit, or you’re concerned that your file will inhibit your chances of being approved for a mortgage, don’t hesitate to get in touch.
Among our team of expert advisors we have bad credit specialists, whose input could prove invaluable for your application. We can also point you in the direction of those lenders with the most flexible criteria, specifically aimed at bad credit applicants.
You can give us a call on 02380 980304, or submit an online enquiry using our simple contact form, and a member of the team will be in touch.