Unit 4:11 Credit Checks

Question 1

Credit Assessment Information

Answer 1

• Credit accounts (loans, cards, mortgages)
• Payment history
• Current debts and balances
• Credit utilization
• Public records (bankruptcies, CCJs)
• Electoral roll registration
• Recent credit applications

Question 2

Credit Assessment Limitations

Answer 2

• Pending court hearings
• Purely cash transactions (undeclared)
• Income or cash borrowings from family
• Action for maintenance/child support claims
• Borrowings yet to be drawn down

Question 3

Payday Loans

Answer 3

• Short-term, very high interest unsecured lending
• Designed to be paid off on the borrower’s next payday
• Generally viewed negatively by mortgage lenders
• Can indicate financial difficulty
  -Recent payday loan use often reduces mortgage borrowing capacity
  -Multiple payday loans may lead to declined applications
  -Typically visible on credit reports for 6 years

Question 4

Role of a Guarantor

Answer 4

• A guarantee is a formal agreement to accept legal responsibility for loan repayment if the borrower cannot or will not repay it
• A guarantor can be an individual, company, or partnership providing this guarantee (also known as a surety)
  -Guarantor takes on financial liability if primary borrower defaults
  -Often used for first-time buyers or those with limited credit history
  -Guarantor’s income and credit status will be assessed by lender
  -Guarantor may have a charge placed against their property

Question 5

Types of Guarantor Liability

Answer 5

1. Full Liability:

• Guarantor liable for entire debt if borrower defaults
• Must demonstrate ability to afford at least 100% of the mortgage plus own existing commitments

2. Limited Liability:

• Liability limited to difference between loan lender would normally agree to and loan needed
• Typically includes additional percentage (perhaps 10%)
• Less risky for guarantor than full liability

Question 6

Issues That Can Void a Guarantor

Answer 6

1. Lack of capacity to contract
2. Undue influence (e.g., pressure from family member)
3. Misrepresentation (e.g., guarantor given false information about liability)
4. Misapprehension (e.g., guarantor misunderstands extent of commitment)
5. Mistake
6. Duress

Question 7

Joint Borrower Sole Proprietor Mortgage

Answer 7

• Property purchased in sole name of buyer with guarantor as joint borrower
• Joint borrower jointly and severally liable for mortgage but has no rights over property
• Making joint borrower a joint owner would trigger SDLT surcharge
• First-time buyer SDLT exemption doesn’t apply if one owner already owns property
• Helps boost affordability without transferring property rights
  -Useful when borrower has income shortfall but family member can help
  -Different from guarantor as joint borrower is on mortgage deed

Question 8

County/Sheriff Court Judgments (CCJ)

Answer 8

• Court order issued when person can’t pay creditors
• Stays on register for 6 years
• If paid within one month, removed from register
• If paid after one month, marked as “satisfied” but still visible
• Unpaid CCJs shown as “unsatisfied” for full 6 years
• Can still get mortgage

Question 9

Bankruptcy

Answer 9

• Trustee given legal ownership of all debtor’s assets
• Assets can be sold to settle debts, including property with >£1K equity
• Bankruptcy restriction notice registered at Land Registry
• Bankrupt cannot sell or deal with property - only trustee can
• Severely impacts mortgage eligibility for years after discharge

Question 10

Bankruptcy - Joint Homeowners

Answer 10

• Bankrupt’s interest in property doesn’t automatically pass to trustee
• Trustee can apply for possession order to sell property if bankrupt’s equity is £1,000+
• Trustee files Form J restriction at Land Registry to record their interest
• Where bankrupt’s equity exceeds £1,000, sale can be delayed for at least 12 months if property is family home
• Joint owner can “buy out” bankrupt’s interest from the trustee
• If property is bankrupt’s main residence, trustee has three years from bankruptcy order to decide whether to sell
• Affects mortgage options for non-bankrupt joint owner
• May require refinancing to remove bankrupt from mortgage

Question 11

Form J Restriction

Answer 11

• Filed by bankruptcy trustee at Land Registry
• Records trustee’s interest in the property
• Prevents bankrupt from dealing with the property
• Requires Land Registry to notify trustee of property dealings

Question 12

Debt Relief Order (DRO)

Answer 12

• For those with unsecured debts up to £30,000
• Assets must be under £2,000
• Monthly disposable income under £75
• Lasts 12 months then debts written off
• Appears on credit file for 6 years
• Cannot borrow while in DRO
• No vehicles worth over £2,000

Question 13

Undertakings in Mortgage Lending

Answer 13

• A legally binding promise from the borrower to carry out minor repairs/improvements to bring a property up to standard
• Typically required for properties in generally good repair but needing modernization (not for serious structural defects)
• Lender reserves right to inspect property 3-6 months after completion to verify work is completed
• Forms a condition of the mortgage offer