Traditional lenders’ automated credit scoring fails to take account of unexpected events, unlike specialist lenders
In today’s market it can be difficult for someone with adverse credit to secure a mortgage with a high-street lender. Many banks continue to employ automatic credit scoring based on traditional lending criteria, which means customers with an unfavourable credit history are usually rejected.
Specialist lenders, on the other hand, often are willing to help applicants like these. That said, it is essential for underwriters to understand the reasons behind an adverse credit rating, and for lenders and advisers to communicate to borrowers the options available to them.
When submitting bank statements and financial records, applicants should disclose in as much detail as possible any areas where their credit has been negatively impacted. When this is done, underwriters can build up a more holistic picture of the customer’s situation in order to understand the real drivers behind the blips.
Unfortunately, events out of our control do happen and in these circumstances customers can be turned away by traditional lenders.
Take, for example, a couple wanting to borrow £192,000 to repay their existing mortgage, £9,000 to repay second charges on other loans and £30,000 for home improvements. Their property is worth £700,000. Sadly, during 2011–14 their daughter became seriously ill. One of the applicants had to give up work to care for her and the other had just left full-time employment to start their own business. These resulting pressures on the household finances led to four defaults, totalling £36,000, and some mortgage arrears.
Automated credit scoring fails to take into account the occurrence of an unexpected event like this but some specialist lenders’ analysis will exclude defaulted payments and mortgage arrears over certain periods.
Because these applicants could show their financial troubles were linked to these unforeseen circumstances – and could prove that they had managed their finances effectively since then – they found a lender to approve the application. As a result, their new mortgage payment was £300 less each month than their previous mortgage and loan payments.
In this next case, an adviser had a customer who owned an unencumbered property worth £480,000 and wanted to borrow £283,000 to consolidate his debts. His debt was split between a bridging loan of £195,000 on his mother’s property and £88,000 on unsecured debts. Due to a divorce, the customer had been forced to take out the bridging loan for quick access to funds, while the unsecured debts had been jointly built up by the applicant and his ex-wife. The customer was also self-employed and in the process of buying his business partner out of the business.
Certain specialist lenders would see that the customer’s financial pressure was linked to the divorce and related bridging loan payments, not to continuous over-borrowing that could suggest a debt spiral. The customer’s income had since increased and he had become a 100 per cent shareowner earning a director’s salary. On finding a lender to accept the application, his outgoings were reduced by £2,750 a month.
Along with illness and divorce, a number of business issues can also result in adverse credit.
Cases like these demonstrate the crucial role advisers play in facilitating and encouraging customers to communicate the circumstances surrounding their credit history.
Although these are sometimes more complex cases, advisers can support a swathe of the population currently underserved by high-street lenders.
David Chapman is underwriter manager at Bluestone Mortgages