Both status and non-status lenders are important to consider when selecting a property loan, particularly in cases involving bridging and second charge mortgages, lenders will be classed as either a 'status' or 'non-status' lender. This is dependent on whether or not they take the applicant's credit into account as well as a number of other factors.
As with the majority of financial products, credit checks for mortgages and property finance applications are a regular occurrence for thousands of applicants across the UK. These checks are an essential part of the application and approval process for most lenders of property-related finance. Whilst there are numerous factors that are considered during the underwriting process, the credit record of applicants carries a great deal of weight.
These checks of an applicant's credit record and history are carried out when it comes to products such as mortgages, development and bridging finance, refurbishment loans and the necessary finance for property auctions. Checking one's credit record is used by the lender to make an informed lending decision; whether to accept or reject the prospective borrower or company in question.
What is a Status Lender?
A status lender is one who is regulated by the Financial Conduct Authority (FCA) and who therefore checks an applicant's credit score and history as part of their process of application. These types of lenders are also more likely to require additional documentation related to income and affordability such as proof of income and details of the prospective borrower's employment status. This is all required by these lender is order to be able to formulate a clearer picture and a better understanding of the borrower and their circumstances.
It means that before making the final lending decision, the lender is well-placed to assess affordability and the borrower's track record in cases of credit and loans. However, whilst a borrower's income and credit file are not necessarily part of the underwriting process undertaken by status lenders, they are an important part of the process. Furthermore, ultimately in the case of all types of property loans and mortgages, the property belonging to the borrower acts as security for the loan. This means that the lender can seize the property to recoup their costs should the borrower default on the loan.
A major benefit of status lenders is that the loans and mortgages they subsequently provide are likely to offer a higher Loan-to-Value (LTV) compared to non-status lenders. This is because their lending decisions are based on the borrower's financial practices, providing a more comprehensive picture of the borrower as a lending prospect.
Non-status lenders do not require the same details as part of their application process as status lenders do. For example, non-status lenders do not necessarily ask the borrower to provide information around their credit past, income and financial status and dealings. Furthermore, non-status lenders are not generally regulated by the FCA meaning their process can be quicker as there are less checks and balances required as part of their process.
However, because they do not acquire comprehensive information around credit histories and past credit dealings, the risks for these lenders is higher. Therefore, the LTV offered will usually be lower than that of status lenders (potentially less than 70% LTV.)
Non-status lenders also view the loan in question through its business viability. This means that rather than taking a credit history into account, the lender will assess the Gross Development Value (GDV) and the project or venture as a whole, taking into consideration the potential for it to be viable and profitable. For example, in the case of a non-status bridging loan for refurbishment purposes, the lender may look at how much value the investment will add to the property.
These unregulated loans are also often suitable for those who are not able to provide their financial information as required by status lenders. For example, self-employed individuals who are unable to show their income may be unsuitable for status loans but suitable for a non-status equivalent.
Additionally, because of the reduced underwriting and credit checking involved with these loans, they are often used in cases where time is of the essence and funding is needed quicker than in the case of a status loan, for example in the case of auction finance in which a borrower has strict time constraints. For example, in cases where a developer may need to secure the funding for a property purchase before a competitor manages to.
Finding the Perfect Lender
It is important to know from the outset whether to apply with a status or non-status lender in the case of property-related loans. Both types of lender have their merits and pitfalls and there are cases where each type's strengths and advantages lie.
For example, in some cases where a mortgage or property loan of any kind is needed, the risk may be deemed too high for a status lender, but not so for a non-status lender. Furthermore, some prospective borrowers' circumstances lend themselves to non-status lenders due to income that is not fixed, such as in the case of contractors who may receive irregular income.
Credit checks in general tend to be either hard or soft checks with the former leaving a trace of the credit search on the applicant's credit file and the latter not doing so. It is crucial that a lender understands borrowers' affordability and creditworthiness as the risk will be greater for the lender if the borrower has several loan defaults in their past.
Furthermore, these checks are sometimes carried out by landlords and lettings agents in cases of property rentals to make sure tenants can afford the rent in the context of their income and credit position.