Page 5: Credit scoring
Credit scoring is a technique used by many lenders to assess credit worthiness. It is a proven statistical technique which allows Britannia to calculate and predict the likelihood of non payment of a debt. Although most lenders use credit scoring, they each have a different score card, because they have different lending policies and experience.
Britannia’s credit score works by giving points, which are allocated based on the answers given on the application form and on personal information provided by the credit reference agency. The decision is then taken, based on whether or not the applicant passes a certain score. The system does not discriminate against race, sex or geographical area, and is considered by the Government to be an aid to promoting and safeguarding consumers’ interests.
Assessing the property
The assessment of the applicant is only one side of the equation when deciding whether to grant a mortgage. The other side involves assessing the property. The security provided by the property is an insurance against the risk of default by the customer, as it can be repossessed and sold to repay the loan. When a building society considers any mortgage application, a vital concern is to ensure the property to be mortgaged offers sufficient security for the loan.
Before making an assessment of a property, it is necessary to clarify the types of tenancy and property a building society will normally lend on.
These fall into the following areas:
- tenure - is the property freehold (i.e. owned absolutely by the borrowers when the mortgage is repaid) or leasehold (i.e. owned by the occupiers for a fixed number of years, - a lease)
- acceptable and unacceptable properties - Britannia will not lend on mobile homes or houseboats
- suitable construction materials.
Britannia is usually prepared to lend only where the property is:
- built with traditional brick or stone
- timber framed with a suitable guarantee, with the whole of the outer skin being built in brick.
The Stevens wanted to buy a brick built house on a freehold house over a 25 year period. Britannia was happy with this arrangement and set out to value the property.
Building societies always arrange a valuation of every property on which a new advance is made. Both borrowers and lenders want to be assured that the value matches up to the purchase price and there are no defects which could affect the property’ marketability and value. A valuation report provides concise information on the state of repair and condition of the property. It is important to realise that there are different levels of report, depending on how much time and effort the valuer is asked to put into examining the property. The more detailed the report, the more expensive it will be to undertake. These valuations must be done by qualified surveyors.
Where properties are overpriced then the purpose of the valuation will be to put a true value on the property. The buyer may still want to proceed with the purchase but will find that the Building Society will only provide up to 95% of what it considers to be the real value of the property. In some cases, for example, when a property is suffering from severe subsidence, then the building society may not be prepared to advance any mortgage at all.
The Stevens house was in an excellent location and passed all the valuer’s detailed checks. They had £8,000 to put down as a deposit on the £60,000 house of their choice. The independent valuer employed by Britannia valued the house at £60-65,000 and found it to be in excellent condition.