How does selling a home with a mortgage affect credit scores?

The main credit-score consideration is how the mortgage is settled, rather than the fact that the property is sold. Where the lender receives the amount required to redeem the mortgage and the account is closed correctly, the credit file should show that the borrowing has been settled. Problems are more likely where the sale leaves an unpaid balance, the account is already in difficulty, or the lender does not receive the expected payment.

Before exchange of contracts, your conveyancer will usually obtain a redemption statement from the mortgage lender. This confirms the amount needed to repay the loan on a particular date, including any interest or applicable charges. At completion, the conveyancer uses the sale proceeds to redeem the mortgage. Any remaining funds are then dealt with according to the completion statement.

Once redemption has taken place, the lender normally updates its records with the credit reference agencies. The mortgage account may remain visible on your credit report as a closed or settled account. This is not the same as removing the account history: lenders can still see information about how the mortgage was managed when assessing future applications.

Where the sale proceeds do not cover the mortgage

If the property is worth less than the amount needed to redeem the mortgage, the lender may not allow the sale to complete unless an arrangement is made to deal with the shortfall. The remaining debt could involve a separate repayment agreement or another arrangement with the lender. Its effect on your credit file will depend on whether the arrangement is maintained and whether the lender records any adverse information.

Do not assume that completion automatically clears a shortfall. Ask for written confirmation of:

• the amount required to redeem the mortgage;
• how any shortfall will be paid or managed;
• whether the lender will release its charge over the property; and
• how the account will be reported after completion.

Joint mortgages and linked financial information

With a joint mortgage, the account normally appears in both borrowers’ credit files. Selling the property and repaying the loan ends the joint mortgage, but it does not necessarily remove the financial association between the borrowers. If you have other joint borrowing, or have made a formal application for shared credit, that association may continue until the relevant accounts and links are dealt with.

If a relationship has ended, each person should check their own credit report after the sale. Where there is no longer any shared financial commitment, it may be appropriate to ask the credit reference agencies whether a financial-association notice should be updated. The agencies may require evidence that the joint borrowing has ended.

Protecting your credit record during the sale

Continue making the contractual mortgage payments until your conveyancer or lender confirms that redemption has completed. Completion dates can change, and cancelling a direct debit too early can create an avoidable problem. Keep the redemption statement, completion statement and confirmation that the mortgage was paid off.

After the lender has had time to update its records, obtain your credit reports from the main UK credit reference agencies and check:

• the mortgage is marked as settled or closed;
• the outstanding balance is shown as cleared where it should be;
• the completion or closure date is accurate; and
• there are no incorrectly reported arrears, balances or financial associations.

If an entry is wrong, contact the lender first and raise a dispute with the relevant credit reference agency if necessary. Keep evidence of the redemption and completion, as it can help establish what should have been reported.

Finally, remember that credit scores are calculated differently by each credit reference agency, while mortgage and loan providers use their own lending criteria. A settled mortgage can be useful evidence of previous borrowing management, but it does not guarantee acceptance for future credit. If you plan to apply for another mortgage after selling, allow the old account to be accurately updated and make sure your new application reflects your current income, commitments and address.