It’s a widely known fact that, specifically over the past 12 months, the ropes have tightened when it comes to getting approval on a mortgage, especially as a first time buyer (yet thousands of home owners are also seen as trapped, unable to get a mortgage to allow them to move) and, as such, many are finding that lenders are turning them down left right and centre.
Don’t let this be you! By taking your time to understand why lenders are turning applicants down, you can ensure you meet their criteria and that you aren’t struck down at the first hurdle. Whilst much of it is common sense, you’d be surprised at how many first time buyers jump straight into a mortgage application without really taking the time to speak with a mortgage broker, consider how much they can really afford to borrow or have even failed to make sure they’re on the electoral roll!
Here are five reasons why you might be turned down for a mortgage and guidance and what you can do about it to ensure you’re not the ones whose application is unsuccessful!
1. You Can’t Afford To Borrow
Whether you’re sitting down with a mortgage broker or applying directly to a lender, one of the first things which they’ll do is carry out an affordability check. At the end of the day, all lenders want to ensure that they’re not taking a risk lending and, as such, will want to know a full breakdown of monthly incomings and outgoings covering everything from your bills through to what you spend on clothes and nights out.
When considering a mortgage application, lenders want to make sure you’re able to comfortably afford repayments each month and, as such, it’s important that, when you provide bank statements, it’s clear that this is the case. If you’re finding you’re spending every last penny each month, maybe it’s time to cut back on the luxuries and keep a little spare in the bank to demonstrate you’re able to budget properly and make your money last.
It’s not uncommon, in addition, for first time buyers to be aiming a little too high and to be applying to borrow more than they can comfortably afford. Of course, the higher your deposit the more you’ll generally be able to borrow, however if you’re working on a lower deposit, that may mean the house you want isn’t necessarily the house you’ll be able to get.
What Can You Do?
If you’re worried that you may not be approved for a mortgage on affordability grounds, take a look at what you’re applying for in the first instance. Are you looking at houses which are a little out of your league at the moment? If so, consider looking a little lower on the property ladder. Maybe that means you’ll have to do a bit of work to modernise a house or maybe even sacrificing that spare bedroom or garden which you wanted, however if it means you get approval on your first home, it’s one worth making!
On the other hand, if you feel your outgoings are a little high, do your best to stick to a budget. Take a look at Rightmove’s ‘Cost Of Buying‘ guide to get a feel for costs involved as well as Money Saving Expert’s Budget Planner.
2. You’ve Not Got A Credit History
You may wrongly assume that just because you don’t have a bad credit rating, you’ll have a good one but that isn’t necessarily the case. For many first time buyers, there really is such as thing as having no credit history. We all know that applying for too much credit can be a bad thing, however so can applying for absolutely no credit at all.
You may feel that, by being careful with your money and not spending on credit cards that you’re showcasing you’re no risk, however lenders want to see that you repay money you’ve borrowed on time. The bottom line is that lenders want to see you making repayments and that you’ve borrowed before – they don’t want to be the ones who take the risk on someone taking credit for the first time, one who doesn’t have a track record of making payments on time.
What Can You Do?
It’s important that you make every effort to build up a strong credit history and one of the best ways to do this can be done is by using a credit card. You don’t need to spend a fortune on your credit card each month and so long as you repay on time, you’ll pay no interest, but it’s absolutely essential that you become aware that this will help your credit rating considerably and that it’s something which can significantly increase your chances of being approved for a mortgage.
3. You’ve Not On The Electoral Roll
Lenders all use the electoral roll to check that you live where you say you do and, as such, it’s absolutely essential that you’re on it! It’s hard to believe that something so simple could be the decision point on a mortgage being approved or declined but again, it all comes back to lenders wanting to ensure they’re lending to the right people who they can be sure will make repayments on time. Given that getting on the electoral roll (if you’re not already on it) costs absolutely nothing, it’s strongly suggested you double check and register if you’re not.
Given that lenders like stability, it’s also advisable that you try and remain at the same address consistently and, if at all possible, avoid flitting between addresses on a regular basis.
What Can You Do?
If you’re not on the electoral roll, register today! You can register for free here and you’ll be pleased to know it only takes about 5 minutes from start to finish!
4. You’ve Got Too Much Debt
In some ways, this comes back to the first point about affordability, however it’s important to understand that debts are a serious concern to lenders. Some lenders will look simply at the level of debt you have at the moment (including credit cards, loans and other such borrowing but not including the likes of student loans) whilst others will consider the level of debt you could have if you maxed out your credit cards and overdrafts, even if you have no intention of doing so.
As such, it’s important that, prior to applying for a mortgage, you do your best to reduce debts as much as possible. In some instances, you may well find that you’re more likely to be approved for a mortgage with a slightly less deposit yet lower levels of debt than higher debts and a higher deposit.
What Can You Do?
If you’ve got old credit cards, store cards or accounts with overdrafts which you no longer use; close them! If a lender is looking at the potential level of debt you could have, these could well contribute to a declined mortgage application. On the other hand, do your best to settle debts as soon as possible and make payments as high as possible each month to reduce debts quicker.
5. You’re Self Employed
Unfortunately, self employment can alert lenders to a higher level of risk and it can, at times, be difficult for those who work for themselves to get approved for a mortgage straight off. This is to do with the fact that income can be less stable for those who are self employed and lenders want to ensure that they’re going to receive repayments on a monthly basis and that an unstable income can be a sign of missed payments.
Of course, this doesn’t mean to say that you can’t get a mortgage if you’re self employed, it often simply takes a little more planning ahead. As an example, lenders will often want to see at least three years worth of accounts (although a number are starting to take applications with just one years) and that you’ve had a regular income across this period.
What Can You Do?
If you’re working for yourself, it’s important that you understand the need to keep accounts and that these are as in-depth as possible. It may be that you simply have to accept that it will be another 12 months until you’ll be approved for a mortgage, however having a regular income in place can help considerably. Focus on building your business and ensuring you’re able to showcase to lenders that you earn a stable income and that you’re financially stable.
At the end of the day, there’s a number of reasons why mortgage applications are declined, however in many instances, they’re common sense and if you ensure you’re able to budget, reduce debts and focus on building a strong credit rating, you’re increasing your chances of approval considerably.