What does 'Credit Check' mean when buying a property?

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Credit Check

Most people who are buying a property need a mortgage and getting one takes you through multiple stages, one of which is the credit check. I'll explain what it is, how it fits in and how you can get ahead of the game.

When you need to persuade a lender to give you a mortgage it starts with an Agreement in Principle (AIP).

Most lenders offer this service online. You tell them how much you earn, what debts and other financial obligations you have and they'll spit out a number which is how much their prepared to lend you provided everything you have said checks out. Because they haven't checked it out the loan amount is only "agreed in principle".

There are two ways forward from here:

  • You can get a Pre Arranged Mortgage (PAM) if the lender offers it. This is where they check out your claims and run a Credit Check.
  • You can wait until you have had an offer accepted at which point they will check out your claims, run a credit check and decide of the property you have offered on is worth the price you want to pay (via a survey).

So either way all roads lead to a credit check.

Your lender, the credit check and your credit score

To run a credit check the lender will go to a credit agency (such as Experian). These agencies keep all sorts of records about you.

  • How many loans have you applied for recently?
  • Have you ever missed a repayment on a debt?
  • Have you ever been in a dispute with a lender?
  • How much credit do you have access to right now (say via credit cards)?
  • Have you ever had any debt?

The last point - have you ever had any debt - trips over a lot of potential buyers as I'll explain in a moment but for now lets stick with what happens next.

The credit agency munches all this information together and comes up with a Credit Score. Usually this is a number between 0 (no one will lend to you) and 999 (you are a lenders dream).

So a Credit Check is using a Credit Agency to get your Credit Score (or sometimes called Credit Rating).

The Credit Check problem with no debts

The score basically defines if you will be a good borrower or not ... and this becomes an actual problem for some potential buyers who have avoided debt. If you have never borrowed how do they know how good you are at being a debtor when your debt is as substantial as a mortgage.

This is slightly bizarre. Maybe you ran your whole life in financial perfection and never had to borrow a penny. Well guess what, your credit score could be truly awful because of it.

So if you are reading this long before you plan to buy a property get a well known credit card, buy your next weekly shopping with it and then shove it in a draw while you pay it off nice and slowly. This way you create a debtors footprint - you have had debt and you have handled it well.

Credit check yourself before your lender does

Your credit score is not contained in a black box that only lenders have access to. You can have a peak to and its a good idea to do it before you start property hunting to see if there are any unexpected surprises in there.

I'm not just talking about no debt issues, I'm also talking about things which may have happened in the past and for which the credit agency only has half the picture.

In one case I knew a potential buyer who found he had a low score. When he looked into it he found it was due to a conflict he had had with a car leasing company several years in the past. The case had gone to court and he had won but all the credit agency had was a record that he had missed payments.

By checking up and letting the credit agency know about the court case he was able to have his credit rating corrected long before a lender ever looked at it.

Experian is a good solid go to source for checking your score. Get started early because you may have to jump through some hoops to prove you are who you say you are before they'll hand out your score.

To find out more about all the steps involved in purchasing a property pick up a copy of my ebook How to Really Buy a Property.

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"... Outside the Country - If you have been living abroad or come from abroad there may be nothing wrong with the way you ran your finances but the bank will want to check. In some countries this is a fast proceedure, in others it can take weeks to complete. Because a survey on the property you hope to buy is not booked until the credit check is completed the vendor can get the impression that nothing is happening and decide to look for another..."
"... is offered by some financial advisers and allows you to be credit checked and ready to go without having to bully your bank to do it. The Sequence estate agency group are one such business that offer this service. The other advantage of a PAM is that because you have applied for the mortgage the interest rate and other features of that particular product are often held for up to three months, even if the lender removes that product from the market or increases their..."
"... rates! As a word of caution only apply for the mortgage or mortgages you would definitely go for as each lender will carry out a credit check on you. As mentioned earlier too many checks on your credit history makes lenders suspicious that you are trying to apply for too much debt. Finally..."

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