To buy a home, you either need cash to buy it outright, or a mortgage from your bank or lender to help cover the cost.
In order to assess if you’re eligible for a mortgage, the lender will consider a number of factors including how much you want to borrow, your income, how much deposit you have, and over how long a term (years) you want to take the mortgage.
The loan will be secured on the property you buy so if you fail to pay it, the bank might eventually repossess it – take ownership – to recover your debt.
One of the best ways to prepare for a mortgage application is to understand the reasons you might be refused a mortgage in the UK in the first place.
Your credit rating
Every time you apply for credit (items like a loan, credit card, store card or finance for a car or furniture) a ‘footprint’ is left on your credit report. Your credit rating also takes into account your history of monthly repayments including if you were late or missed any.
You can use a credit checker like Experian to look at at your simple credit report for free, or pay monthly for a more in-depth analyses of your credit rating.
Mortgage lenders will look at your credit history to help them figure out how much of a risk you pose financially – e.g. do you have a low credit score? Have you missed any payments? Defaulted on debt? Taken out multiple lines of credit? Declared bankruptcy or been subject to a CCJ (County Court Order).
Some or all of these may be taken as a sign you’re failing to manage your finances well. Each lender has their own special algorithm, so a good credit rating – whilst helpful – is not a guarantee of getting a mortgage approved.
- Comb through your credit file and if there are any errors, report and request to fix them. Sometimes, companies make mistakes so it’s important to make sure everything in your file is correct. This will also help you identify any incidences of identity theft – when a fraudster has used your identity to obtain credit
- Make sure you are registered to vote at your current address (on the electoral role) to help mitigate identify theft
- The lower your revolving credit (how much unsecured debt you have) the better. Work towards paying off as much as you can, starting with the highest interest first. You could alternatively start with the lowest sums that you can pay off in one go to reduce the number of lines of credit you have and boost your credit rating a few points
- If your credit card or cards are all maxed out or you’re very near your credit limit, this will adversely affect your credit rating, even if you’ve never miss a monthly payment. Repaying only the minimum amount may also negatively impact your credit file
If your deposit is too little, you may be refused a mortgage. Whilst five per cent deposit schemes are available, usually, lenders give better mortgage rates for 10 per cent deposits or more.
What they’re looking for is the lowest Loan To Value (LTV possible). This is a simple ratio of how much you want to borrow, versus the price of the property. Having a bigger deposit means a lower LTV ratio and poses less risk for a lender if property prices start to decrease.
E.g. you have a deposit of £20,000 and want to get a mortgage of £180,000 to buy a property worth £200,000. That’s a 90 per cent LTV, as you have a 10 per cent deposit. If you increase that deposit to £30,000, your LTV reduces to 85 per cent and it will likely make a positive difference to your chances.
TIP: you can either take more time to increase your deposit, or you can apply to borrow less and reduce your house property budget. E.g. you still have a £20,000 deposit but you apply to borrow £160,000, giving you a total budget of £180,000 and a LTV of 88.9 per cent. You could also do a little of both – increase your despite whilst lowering your property budget and therefore the LTV.
How much you earn and whether you’re planning a mortgage application on your own or with somebody else matters.
Usually banks look to lend a sole applicant a maximum of five times their salary, or three times for joint applicants.
Your mortgage application might be rejected if you apply for too much. You might also be turned down if:
- You have recently become self-employed as lenders typically need at least two years of self assessment tax returns to get an idea of your income
- You are on a temporary or zero-hour contract, or you have recently moved job and are in your probation period
If worst comes to worst and your mortgage application is rejected, don’t rush to apply elsewhere. This can adversely affect your credit rating and chances next time.
Instead, talk to a financial advisor who may be able to help figure out where things went wrong.