According to a report in The Guardian, one in six homeowners had been refused a home loan in the past, so it is a situation that is very common. The process of applying for a mortgage and the criteria requirements can be confusing if you don’t have much knowledge on the subject.
Some people are tempted to start applying for a mortgage online without assessing their financial situation and likelihood to get approved, which can have negative consequences – for example, your credit score could be affected by a declined mortgage application.
To avoid having your mortgage application declined, it is important to understand the main reasons that applicants get declined:
When you submit an application, any debt that you have accumulated on credit cards, store cards, car loans or other types of loans will be taken into account. If you have a large amount of debt, then a mortgage provider could consider this to be a risk that could prevent you from paying back their mortgage loan. However, they will take other factors into account, so if you do have debts, you might still have your mortgage application approved, as long as they deem that you can afford the additional mortgage loan.
Your income is a key factor for a mortgage provider to determine whether they deem you to be able to afford to make the regular mortgage repayments over the length of the term. They will review your current outgoings, looking at all debts that you have outstanding to assess whether they think you will be able to afford the mortgage loan on top of the existing payments that you have.
Most mortgage providers have online calculators that will show you how much you can borrow, based on your earnings. So, if you apply for a mortgage that is £250,000 but your calculated loan limit is £220,000 then your application will be declined.
Financial history/credit report and rating
Before applying for a mortgage, or any other large loan, it is always a good idea to check your current credit report. You can use companies like Experian to check your report, to ensure that you are fully aware of your current financial situation. There are three main credit reference agencies that currently provide information to mortgage lenders, which are Equifax, Experian and TransUnion.
If you have had recent missed payments, defaults or CCJs in the last six years, or other negative issues that are flagged in your credit report, this will impact your ability to get a mortgage approved. If you can spend at least six months improving your credit score before applying, it will improve the possibility of getting your mortgage application approved.
Your current and historical financial links can also have a big impact on your credit rating, so if you had a joint account with someone make sure that you financially de-link to avoid their financial activity reflecting on yours. Financial association includes any kind of credit account that has been shared in the past, can show negatively on your own credit rating if the person has a poor credit history.
Not registered on the Electoral Roll
Being on the voting register improves your credit score and will help to reduce the chances of your mortgage application being declined. If you have moved address and not updated your details on the electoral roll, this can also impact the result of your application, so make sure yours is up to date before you apply.
Wealthy but cash is tied up in assets
Sometimes people are in a situation where they are financially wealthy, but their money is tied up in assets. For example, they might own a high-value property but don’t have regular income to show affordability of the mortgage. So, whilst they have a number of financial assets that add up to a large value, they could apply for a mortgage but get declined.
Previous track record
As well as reviewing your financial history in terms of looking at your past loan repayments and how financially reliable you have been, lenders will look for past behaviour for clues to how you might behave with their loan. An example of this could be if you have refinanced your mortgage every couple of years for financial gain, the lender may be cautious about lending to you.
If you are self-employed or work as a contractor, without what is regarded as a regular, consistent income, it can be harder to have a mortgage approved through standard mortgage lenders. Usually, when you apply for a mortgage, the lender will request that you provide your last three payslips as proof of income, so self-employed people and contractors are not able to prove their income this way. Specialist mortgage brokers for self-employed people and contractors are the best way to avoid having the application declined.
One of the most common and avoidable reasons for a declined mortgage application is where an error has been made, i.e. incorrect information has caused your application to be declined. Something as simple as a wrong house number on the address, or other small but significant details could result in not being approved.
Too many recent credit applications
Every time you submit a credit application, this is recorded on your credit report and if you apply for several in a short space of time, then this will usually be flagged as a risk on your mortgage application.
Applying for the wrong type of mortgage
There are lots of different mortgage types with different sets of criteria for being accepted. For example, if you apply for a first-time buyer mortgage but you previously had a mortgage, your application would be declined.
Your story doesn’t add up
Some mortgage applicants will fabricate information in order to try and get a mortgage, or to get a larger mortgage loan than they qualify for under the lender’s criteria. Stories that people have made up include having a recent pay rise that they cannot prove, or other ways of trying to show they have a bigger income than they actually do. Mortgage lenders will usually see through any attempts at tricking them and this is why they perform thorough checks on applicants.
My mortgage has been declined, is there anything I can do about it?
If your mortgage has been declined, there is a good chance that it is down to one of these reasons listed above. The lender you have applied to may be able to tell you exactly why the application was declined so that you can then try and rectify the situation.
There may be some quick improvements you can make to your credit report, such as closing down unused accounts, financially de-linking from a past partner, or registering onto the electoral roll.
If your credit history is the problem, then you should request a recent report from a credit agency so that you can look through any missed payments that are affecting your application. There could be a loan that you forgot about that you have accidentally not been paying, or you could even be the victim of fraud, where someone has taken out credit in your name and left you with debt and non-payments.
If you have a large loan payment going out of your account each month at the moment, but it will be paid off in the next few months, you might find that your application is approved once that debt has been fully paid off. Similarly, if you had some missed payments on your credit history dating back a few years, these will no longer be on your report after six years, so your credit score will improve after that time.
You might also consider using a different mortgage lender, as each one has different lending criteria, so whilst you might get declined by one lender, another could approve your application. Sometimes this might mean that you are expected to pay a higher amount of interest rate, so it is worth talking to a broker like Boon Brokers to identify the best type of mortgage lender for your situation.
Can my mortgage application be declined after an agreement in principle?
Yes, sometimes a mortgage lender will provide you with an agreement in principle that will give you an indication of the amount you can borrow so that you are looking for houses in the right price range but then the lender may still decline your application. This can happen because they perform a more in-depth background check that could reveal that you don’t match their full criteria for mortgage approval.
If you are concerned that your mortgage application could get declined, or you would simply like some advice on the criteria for mortgage applications, call Boon Brokers. We are happy to talk through your financial circumstances to provide advice on your mortgage application options.
Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.