If you are thinking about buying a property then one of the most important steps of the process is to obtain a mortgage, unless you are a cash buyer.. Mortgage lenders have strict criteria in place to manage the risk of lending huge sums of money to people, so not all mortgage applicants get the answer they want.
As well as assessing whether or not to lend to a mortgage applicant, the lender will also assess how much they are prepared to lend to them. Therefore, if you are looking at applying for a mortgage in the near future, these are some of the important factors that impact your chances of getting a mortgage:
Bad credit score
Before you apply for a mortgage it is a good idea to check your credit score. Mortgage applicants with a bad credit score will find it much harder to get a mortgage offer, as the lender will see any past history of missed payments as an indication that the applicant could miss mortgage repayments. CCJs (County Court Judgements) have a significant impact on your credit score, so if you have any CCJs or multiple missed payments, you should expect to have some difficulty finding a good mortgage deal. It is a good idea to access a free trial on Check My File to view your credit score from Experian, Equifax and Transunion in one report. This will give you a reliable indication of your credit status.
If your credit score is low, it could be worthwhile waiting 6-12 months, using this time to make sure all of your loan and credit payments are made on time, to improve your credit score. The longer ago a CCJ was issued, the more chance you have for your credit file to have improved, and after six years a CCJ will no longer show on your credit report.
You could find that you have a low credit score because you do not have any credit history. While you might think it is a good position to be in because you have not borrowed any money and do not owe anything, the lender will be looking for examples that you are good at paying off credit. Having a credit building card can give you a first step to getting credit history, if you have none and you cannot get a standard credit card.
Paying bills is also a good way to build up credit history, so having something like a phone contract in your name will also help, if you cannot put any household bills into your name.
It is also important to register on the electoral roll, as this also helps to build up your credit score. The electoral roll is very easy to register for and it is difficult to get a mortgage if you are not on the electoral roll.
If you are not able to improve your credit score, you may still be able to get a mortgage but you might need to go through a specialist lender who charges a higher interest rate due to the higher perceived risk of lending to someone with bad credit.
Every lender has a different set of criteria for approving or declining a mortgage application, so even if you get turned down by one lender, you may still be able to find another lender with criteria that is more favourable to your financial situation. A broker should be able to help you to find the right type of lender for your specific circumstances, whether that is with bad credit, no credit history or any of the other factors that impact your chance of getting a mortgage.
When a lender is deciding whether to lend to an applicant, they will review their income to help calculate affordability, to ensure the applicant can afford to pay off the mortgage repayment each month.
Your income will determine how much the mortgage lender is prepared to lend, historically a lender would have an exact calculation such as four times your salary but there are more factors taken into the calculations now. As well as using your salary in the calculations, lenders look at how much expenditure you have each month.
Therefore, when you are planning to apply for a mortgage in the near future, getting into a position where you minimise your outgoings will work in your favour. For example, if you have another loan such as a car loan that will soon be paid off, you would usually be better waiting until it is paid off, if you want to be able to borrow a higher amount.
The loan-to-value ratio can also impact the amount a lender is prepared to offer. For example, if you are taking out a 75% mortgage, the lender might be prepared to offer more than they would if you were applying for a 90% mortgage.
For people on lower incomes, there are other opportunities to get onto the property ladder with schemes such as:
Help to Buy
The Help to Buy equity loan scheme was introduced by the government to help first time buyers and existing homeowners to buy a new build property. It allows you to borrow 20% of the purchase price of the property, which is interest free for the first five years, but you must be able to pay a minimum of 5% deposit.
With shared ownership you can own a share of a property, while a housing association owns the rest of it, then you pay rent to the housing association for the percentage that they own. There is a range of different arrangements available, starting from owning 25% up to 75% of the property. It is available for first time buyers and also people who previously owned a home but can no longer afford to buy one.
Right to Buy
The Right to Buy scheme enables eligible council and housing association tenants to buy the property they live in at a discounted price.
One of the most significant barriers to buying a home since lenders stopped offering 100% mortgages is the amount of deposit required. The majority of mortgage loans are usually available with a minimum of 5% deposit, so that means if you are looking at buying a property worth £150,000, you would be required to have a deposit of £7,500. It is worth noting that during economic shocks, like we are currently experiencing in the coronavirus pandemic, 5% deposit mortgages have temporarily been removed from the mortgage market.
A larger deposit will enable homebuyers to get better mortgage terms, such as a lower interest rate, so the deposit is a very important factor in obtaining a mortgage. The difference between having a 5% deposit and a 10% deposit can result in much better mortgage terms, so if you have saved close to 10%, it will probably be worthwhile saving the full 10% before applying for your mortgage to access better deals.
People who are self-employed will generally find it more difficult to get a mortgage, due to the lending criteria of most mainstream lenders. A common requirement for mortgage applicants is to supply payslips for the last 3-6 months to provide evidence of salary. For self-employed workers, they do not usually have payslips and their income might vary each month, depending on how well their business is doing. As a result, lenders tend to
request the last 2 years of Tax Calculation and Tax Year Overview documents for the self-employed applicant.
For self-employed people, using a specialist mortgage lender who deals with self-employed mortgages may be the best way to obtain a mortgage if mortgage affordability is an issue with the mainstream lenders. Specialist lenders have different lending criteria and will use evidence such as tax returns, business bank accounts and business projections as proof of income instead of payslips.
Too much existing debt or credit applications
Even if you are paying all of your credit payments on time and you do not have poor credit history, if you have a large amount of outstanding debt then some lenders may decline your application due to this.
Another reason mortgage lenders sometimes decline applications is if the applicant has recently applied for credit before submitting the application. Even if you do not take out the credit, the application will show on your credit file and this might be a red flag for some lenders that you are trying hard to obtain credit.
It is recommended to not apply for credit for at least the six months leading up to your mortgage application, to stand the best chance of having it approved.
Some lenders will look at how you spend your money and look for expenditure that indicates a risk. For example, if someone spends a lot of money online gambling or in a casino, card transactions will show up on bank statements that the lender may want to check. Also, if someone spends a lot of money in the pub and does not have much money left at the end of the month, this could potentially prevent a mortgage from being accepted.
Therefore, in the months leading up to a mortgage application, being more careful with what you are spending, or at least what is showing up on your bank statements, will help you to have a mortgage approved.
If you have applied for joint finance at any point, whether that is a previous mortgage with a partner, or even opening a joint bank account, you will be financially linked to them. If you had a joint bank account in a house share, you will be financially linked to the others on the account, so you should write to credit agencies requesting a notice of disassociation.
If you do not de-link yourself, if people you are linked to have any missed payments or other financial issues, this will show up negatively on your credit file too. So, if you have ever been financially linked to someone, you should always de-link yourself as soon as possible, simply closing the account(s) will not automatically de-link you.
Similarly, if your current partner has adverse credit, financially associating with them could cause your mortgage application to be declined, even if you only apply in your name. So, carefully consider your options before taking out joint bank accounts and joint credit. It might be a better option for you to apply for a mortgage solely in your name if you are not already financially associated to them.
Each individual situation is different, so you might want to speak to a broker to explain the situation so that you can work out the best option. Factors such as the severity of poor credit i.e. if they have been made bankrupt or have recent CCJs, these are more likely to affect your chances of getting a mortgage.
To give yourself the best possible chance of having a mortgage application accepted, you should consider all of these factors listed above. Being more aware of how these factors impact your mortgage application should help you to make changes that can improve your chances, such as reducing outgoings, not applying for credit and being careful with what you spend money on.
Every lender has a different set of criteria, so even if you have been declined with one lender, it does not necessarily mean you will not be able to get a mortgage. However, you may need to look for a specialist type of lender, so do not just rush to apply for another mortgage if you get declined.
Having multiple declined mortgages will have a big impact on your credit file, so if you do get a declined application, speaking to a broker to review your options will help you to find a mortgage lender that is more likely to approve your mortgage application.
Whether you have poor or no credit history, a small deposit, low income or any of the other factors we have listed, your broker will be able to use their extensive knowledge of the mortgage market to find the best option and avoid a declined application.
If you would like to speak to our specialist mortgage team at Boon Brokers, we would be happy to help you to improve your chances of getting a mortgage and buying a home.