Securing a mortgage may not always be a straightforward process; many factors will impact your eligibility, from credit scores to employment history and even issues with the property itself.
Making a mortgage application involves time, energy and often expense too, so if you are turned down it is both frustrating and disappointing.
A fuller understanding of exactly what influences mortgage lenders when considering applications will help you see the potential pitfalls and prepare effectively for your application.
In this post, we’ll look at what stops you from getting a mortgage and could derail your mortgage plans by outlining some of the most common mistakes and misunderstandings.
Affordability checks
Mortgage providers always undertake detailed affordability checks for residential mortgages to ensure you will be able to afford the mortgage repayments for your proposed property. They will look into what your current outgoings are and assess what percentage of your income will go into repaying the mortgage to assess the risks of the loan.
Your application can be declined even if you already have a mortgage in principle, as affordability and full underwriting checks are not carried out at this early stage.
It’s important to understand that the reasons for declining a capital and interest mortgage application may be many and varied, from severe bad credit to issues with the property.
Take a look at our mortgage affordability calculator for guidance.
Not a big enough deposit or equity
Deposit requirements as a percentage of the total purchase price of the property differ from application to application and will depend upon your circumstances, your credit history and the property you are buying.
This is usually expressed as a loan-to-value ratio (LTV), measuring the mortgage amount you are seeking to borrow with the assessed value of the property.
“In Yorkshire & The Humber, the average first-time buyer property price is £140,000 and the average deposit paid is £33,600. A 15% deposit would equate to £21,000.” Matt Illingworth, Mortgage Advisor
When you’re getting a mortgage, most lenders require a deposit of at least 5% for a residential mortgage as a bare minimum, but many will want more, and if you are looking to secure a Buy To Let mortgage this may be as much as 25%.
If you already own a property with a mortgage and are looking to secure a mortgage to move home, then you will need to have enough equity in your existing property to cover the required deposit percentage, unless you have additional funding.
Mortgage providers apply income multiples to assess your ability to afford the repayments. Mortgage income multiples usually vary between 4.5 to 6 times your annual income, depending upon your financial stability, amount of income and existing levels of debt. Different lenders have different rules; your mortgage adviser, here at Mortgage360, will be able to assess the best match for your circumstances.
Remember that a larger deposit will help to secure the best possible mortgage interest rate.
Too much debt
Even if on paper your current income looks as though you meet income requirements for the mortgage you are applying for, and you have a good credit rating, a mortgage lender will also look closely at your existing debt to assess your debt-to-income ratio.
So how much debt is too much debt? This will differ from lender to lender, and what a lender deems affordable but typically less than a 60/40 split in terms of income to outgoings is regarded as lower risk, whereas a greater figure on the outgoings side is likely to cause some concerns for the lender.
You fail the affordability checks
Other issues may also impact the affordability aspect and affect mortgage applications. Mortgage rates are subject to change, and your lender will want to have some reassurance that you have adequate disposable income to continue to make repayments even if interest rates rise in the future.
A bad credit record
A bad credit history and a poor credit score will impact your ability to secure a mortgage, particularly if it is a more severe issue like bankruptcy or repossession of a property you have owned in the past.
Mortgage lenders want to keep risks low, so your credit history will be thoroughly vetted. They will look closely at your borrowing and repayment habits such as paying credit card bills on time.
Some lenders take a more lenient approach, whilst others will turn down your application immediately if you have poor credit or a low credit score and they consider you too much of a risk. This is where a mortgage broker will be able to help; they will have an in-depth understanding of which lenders to approach given your credit report.
A refusal for a mortgage will stay on your credit file and may affect applications in the future.
Too many credit applications
Equally, if you make lots of credit applications, this may sound alarm bells for the mortgage provider and indicate you may have difficulty meeting your mortgage repayments – particularly if you have made multiple applications in the months before applying for a mortgage.
No credit history
Conversely, having no transactions on your credit file and no access to credit facilities can also make it difficult when getting a mortgage. If you are considering applying for a mortgage in the future, it might be worthwhile taking out a credit card, using it and paying it off in full each month so you don’t incur interest payments but a lender can see you have adopted a responsible approach to credit and you can now demonstrate to them something of a track record.
Mistakes on your credit report need to be rectified immediately too, as they could be harming your score in terms of poor credit, which could be what stops you from getting a mortgage. Mistakes can happen; someone else’s debt can erroneously be in your name or there could simply be false information on your file. Address this and get it rectified before you make a mortgage application.
Pay day loans
Payday loans also suggest a lack of financial stability in the eyes of mortgage lenders. Even if they are paid on time, the presence of payday loans on your credit report can adversely affect your chances of approval as a responsible borrower.
Employment situation
Your lender will want to understand as much as possible about your job and individual employment situation as part of the application process when getting a mortgage, and this too can affect the result.
If you have just started a new job and are within your probationary period, lenders may consider this a less stable situation, and it may be worth waiting a few months before starting an application so you can demonstrate a longer length of time in post.
In addition, most lenders will want to see a stable income with evidence of at least three months’ payslips or bank statements detailing income payments to validate your income claims and demonstrate you can meet the mortgage payments.
Lenders may also identify issues in terms of consistent income with contract workers, zero-hour contracts, jobs where the pay is commission-based and therefore less easy to prove and sustain, self-employed people, part-time workers and complex business arrangements.
Self-employed people
If you are self-employed, you will face additional hurdles in submitting proof of income to potential lenders. Most will want to see at least two to three years of accounts to verify your income as opposed to just three months of bank statements for payslips for an employed person.
More commonly these days, lenders will base their affordability checks and underwriting on your Tax Calculation documents, as this clearly and quickly evidences the income you have declared for that particular year. To be conservative, a lot of lenders will base this calculation using the lower of the latest year or the average amount of the last two years.
This will also apply if you are switching self-employment status from sole trader to limited company.
The property
Equally, the reasons behind a mortgage refusal may have nothing to do with you but everything to do with the property you want to secure the mortgage for.
If the property is of non-standard construction, has excessive dampness, is located on a flood plain, requires extensive renovation work or even has other unacceptable issues like the presence of Japanese knotweed, these can all lead to your application being declined. They all represent a risk for the lender and are potential dealbreakers.
It’s also worth remembering that rooms such as kitchens and bathrooms, although they don’t need to be modern or aesthetically pleasing, must be functional to secure a mortgage on the property.
Non-standard construction
It will also be more difficult to secure a mortgage on a property deemed to be of ‘non-standard construction’. Essentially, that usually means anything not built using bricks and mortar.
However, there are lenders out there prepared to grant mortgages on more unusual properties – your mortgage broker, here at Mortgage360, will advise you accordingly.
Getting the right lender
Don’t make a decision on which lender you’re going to apply to simply because you have a bank account and a record with a high street lender. Not all mortgage lenders will be right for you and your circumstances.
Mortgage applications can be rejected simply because you aren’t the right fit for them and their particular criteria, not because other lenders will not view you more favourably. This is where Mortgage360 can help. We look at each mortgage applicant as an individual and have an in-depth knowledge of the market which means we can match your application to the right mortgage lender.
Personal factors
Other factors also have a role to play in why a mortgage loan application may be rejected.
Upper age restrictions
Mortgage applicants who are older buyers and buyers who may plan to retire soon can be viewed more negatively by lenders, although there are specialist lenders out there who are prepared to consider applications from older people and senior citizens.
Numerous previous mortgage applications
If you have applied for a mortgage before and been turned down, the lender’s search will identify this as it will show up on your credit file. Although it may not necessarily harm your credit rating, lenders will want to know the reasons behind the rejection.
Similarly, if you have made numerous applications, although these may not necessarily impact your credit score, they will be visible and could be viewed by lenders as an indication of risk.
Errors in your application will also have a detrimental effect on the outcome. Working closely with a qualified mortgage broker will reduce the chance of this and make sure your application is as positive as it can be and ready for scrutiny when it goes in front of a mortgage underwriter.
You’re not on the electoral roll
Make sure you’re on the electoral role to where you live now, or lenders won’t be able to establish your identity and confirm your current address – a vital consideration. It’s easy to do, visit The Electoral Register or contact your local council to make sure your name and details are included.
Short UK residency
If you haven’t lived in the UK for long, then mortgage lenders will view this as an additional risk, even if you’re British and lived here a long time before moving overseas.
Recent large purchases
If your recent spending patterns show large purchases or aspects that could be identified as demonstrating a lack of financial prudence, this can also be an issue. Think about your spending behaviour in the run-up to an application. Avoid using an overdraft where you can and try to maintain a healthy ‘running balance’ at all times.
How to increase your chance of mortgage approval
So what can you do to optimise your chances of getting your mortgage application approved?
- Work to improve your credit rating. It’s easy to check online and easy fixes include always paying bills on time and not leaving large balances on credit cards
- Limit any credit applications to avoid impacting your credit score
- Save to ensure you have the largest deposit possible to demonstrate financial prudence and make your application attractive to lenders
- Try to pay down debts to reduce your debt-to-income ratio
- Ensure all your personal documents are up to date and accurate, with all names spelt correctly and showing your true and accurate current address with no discrepancies and consistency throughout
- Make sure you’re on the electoral register
- Build your income if possible – look at additional work and extra income sources, such as overtime
- Always avoid using payday loans
- Work with a qualified mortgage broker, here at Mortgage360, to ensure your application is accurate and complete
Get professional advice
It’s important to dot the i’s and cross the t’s with a mortgage application. Working with Mortgage360 will optimise your chances of securing a mortgage approval. We will work with you through the mortgage process, helping you to assemble all the right information and matching you with appropriate lenders according to your individual personal and financial circumstances.
Mortgage360, is here for all your property needs. Call us today for a no-obligation chat.
The information contained within this article was correct at the time of publication but is subject to change.
Your home may be repossessed if you do not keep up repayments on your mortgage.
