As a first-time buyer, there’s a huge amount that you won’t know about the mortgage application process. There are lots of aspects that can cause you problems and even result in your purchase falling through. We Buy Any House have looked into the issues that buyers often run into with their mortgage applications, and how you can reduce the risk of being declined.
A big reason that mortgage applications get declined is due to the amount that you’re applying for being too much for the amount that you earn. The rule of thumb is that most lenders will offer between 4-5x your yearly income for a mortgage, so if you’re applying for something much higher than this it’s likely you’ll be turned down.
If this is affecting you, you can either look at smaller mortgages, or if you’re expecting a change in your income, wait and reapply when it’s increased.
Bad credit can be a problem when you’re applying for a mortgage, and is something that you may not even have considered if you don’t check your credit and take any steps to improve it. There are several reasons that your credit score could be low, from having made a lot of late payments and having problems with previous debt to not having your information updated, so you should run your own credit check before applying for a mortgage to know where you stand.
There are plenty of ways that you can improve your credit score, like –
- Ensuring all bills are paid on time
- Being registered on the electoral roll
- Your address being correct
- Breaking any link to someone else with poor credit – this could be a spouse, family member, or a friend if you share an account with them
- Paying off existing debt.
Improving your credit score isn’t a quick fix, but if you know that yours is low you can make these changes before you apply for a mortgage to reduce the risk of rejection.
Debt in your name
Being in debt can cause all sorts of issues in your life, and tends to act as a red flag for mortgage lenders. When you apply for a mortgage, you’re essentially applying for a big loan and they need to know that you’re able to make the repayments. Having existing debt will bring into question your ability to both manage money and pay it back as agreed whether you’ve made late payments or not.
If you’ve currently got some debt but you want to save up and buy a house, it’s better to pay off your debt first and then start to save afterwards. In the long term, this will actually help you save more money as you’ll have less interest to pay on the debt if you pay it back early, letting you save more down the line to put towards your deposit.
A small deposit
Now, the deposit requirement has decreased again and there are specific mortgages on offer for first-time buyers that sit at 5%, but a bigger deposit will provide you more security when you apply for your mortgage.
Previously, most lenders would have an option to offer a 5% mortgage, meaning that your deposit was able to be smaller and not cause too much of an issue. However, when the pandemic hit last year, the property market came to a standstill and the minimum deposit for most lenders shot up to 20%, leaving a lot of potential buyers unable to proceed.
In our guide on how to save for a house deposit, we explain that 5% mortgages do make the process much easier by reducing the target price level. However, if your finances are strained to the point where a 5% mortgage is the only one you can afford, a lender may look unkindly upon you as a credit risk.
Too many credit applications
A lot of people don’t realise that various applications leave a footprint on your credit file, and if your file has got several of these prints, it can be a big no-no for lenders. Applying for any form of credit can leave a trace; some of the most common ones are –
- Credit cards
- Previous mortgage applications
- Payday loans
Even if you’re approved for these credit applications, they can be held against you which is why it’s best to leave a bit of a gap before you apply for another form of credit. Repeatedly applying when you get declined will also have a very negative effect on your credit score, so avoid doing this.
Payday loans often feel like an easy solution to those who are struggling short-term with their finances, but they are a very risky option that you should be wary of. These loans can show on your file for up to 6 years and will put off most mortgage lenders straight away.
Even if you pay the loan back in full and on time, there will still be a record of it and mortgage lenders can often see this as a sign that you’re not in a position to comfortably pay back a mortgage in your current situation, resulting in a rejected application.
There are a lot of reasons that a mortgage lender could reject your application, but considering these points before you apply will put you in a stronger position and give you a better chance of being approved for your new home!
Read more about mortgage applications with the best mortgage books.