When the computer says - No!

Living in the digital age that we do, we are reliant on the workings of computers more than ever before. So many of the decisions that impact our lives are not taken by human beings but instead by algorithms, and this is certainly the case when it comes to the credit checks that we rely upon to go about our business and thrive.

So what happens when we look to apply for credit and the algorithm doesn’t deem us worthy? What happens when the computer says “no”?

Our Digital Selves

The first thing to remember is that it’s not actually us that is being appraised, but rather a digital version of ourselves that lives online. And while the appraisal is based on the information provided by one or more credit reference agencies (CRAs), which should be consistent, experience tells us that there can be discrepancies that we’re at the mercy of.

To find out why we are being declined or referred — more of which later — when applying for credit, we need to know what information the computer is basing its decision on. What is stored on your credit file will be your address history, any existing credit commitments (including, but not limited to, loans, credit cards and hire-purchase agreements (HP)), a record of missed payments, any payment defaults, county court judgments (CCJs) and fraud markers.

Your digital profile will be summed up with a credit score which many people focus all their attention on. While this is a useful indication of how positive or negative things are looking, the devil is most certainly in the detail, and different organisations will assess different aspects of your digital profile in varying ways based on their attitude to risk.

Companies have their own internal scoring mechanisms and assess applicants based on how much debt exists on their profile, how well it’s being serviced now and how well debt has been serviced in the past. Any blemishes and the computer will regard this as an issue; the more blemishes, the bigger the issue — from the computer and the company’s perspective.

Mortgage Applications

All the above is relevant in the case of mortgage applications. The greatest level of credit that will ever be applied for most of us. There are in excess of 90 lenders in the UK mortgage market and the techniques for underwriting applications — financial institutions’ risk assessment process to lending — will vary amongst them.

There are, however, three main pillars to underwriting. Firstly, the determination of suitable collateral, or security — which comes in the form of the property owned or being purchased — secondly, the ability to pay, which is based on a verification of income and affordability, and finally, the applicant’s track record, based on the outlined digital profile and the credit history therein.

This look at the credit profile is typically the first step in applications being processed. It is a precursor to the full application proper and is known as an Agreement in Principle (AIP). This is the first assessment by a lender of a desire to lend to you. Entirely computer-driven, the AIP will be approved, declined, or referred, with this meaning, respectively, the full application can be submitted, no application should be submitted, or there needs to be a closer look.

Any closer look will be carried out, at last, by a living, breathing human being.

What If…

In cases of dealing directly with a mortgage lender and being declined immediately, I would strongly recommend obtaining a copy of your credit report. The CheckMyFile report is particularly useful as it provides the data from all four CRAs. A good mortgage broker will request a copy of your credit report before submitting any application. The information they find will help them choose the most appropriate lender, i.e., a lender that will be most likely to provide a positive outcome.

As mentioned, the different lenders will have their computer algorithms set up to assess prospective borrowers in different ways, and it’s a subjective process. In the 1980s, Margaret Thatcher branded Nelson Mandela as a terrorist. It is apparent that one person’s terrorist is another’s freedom fighter. The same applies in mortgage lending. Some lenders will view the digital you and say no and another will be more welcoming. The inner workings of the decision-making algorithms is only understood by a handful of people at each institution.

From my own experience, I have an idea of which lenders can be “softer” when it comes to providing mortgages, but the credit report is absolutely key. Even then, different banks will use different — or multiple — CRAs, which again makes the CheckMyFile report, in particular, so valuable.

There is Always Hope

The figurative big red flashing “NO” that fills a monitor screen — we’re not aware of a bank that delivers the news quite so ruthlessly — is not necessarily the end of the road. The information that will be garnered from credit reports in the wake of the rejection will provide an indication of the problem.

A mortgage intermediary or broker can help, and if the unemotional computer and its merciless algorithm stand in the way, there are other options and even lesser-known building societies tucked away in the English countryside that deliver mortgages based on the decisions of humans possessing beating hearts and thinking minds. Imagine that.

Paul Anthony Roberts is a property investor and financial adviser with over 20 years of experience of property investing and providing financial services. Cain Lambert Financial Services provides mortgage and insurance solutions, specialising in adverse credit history and buying short lease investment property. Paul also provides coaching and mentoring for aspiring property investors.