Many people aspire to climb on the housing ladder as soon as they can afford to buy a home. After all, paying rent is dead money with very little to show for it at the end of the tenancy. When you buy a home, the money you pay each month on your mortgage is paying off a debt, so when the mortgage is finally redeemed, the house is yours. In addition, property can be an excellent capital investment that usually outperforms most other asset classes.
Despite the obvious benefits, buying a house isn’t that easy. Not many people can afford to buy a home for cash unless they inherit a lot of money or buy a winning lottery ticket. Property is a big-ticket purchase and is it normal to take out a mortgage to pay for it. Unfortunately, lenders don’t hand out mortgages as easily as they did before the 2008 financial crash. As such, there are a great many reasons why you might find it hard to get approved for a mortgage. Read on to learn more about the various pitfalls you face.
A Low or No Deposit
The days of 100% mortgages are long gone. Lenders these days expect to see a minimum 5% deposit before they agree to a mortgage in principle, but you may struggle to find much choice in products unless you can scrape together at least 10% of the property’s purchase price.
The greater the deposit you have saved up, the easier it will be to find a mortgage lender willing to lend to you. A lower loan to value (LTV) ratio is less of a risk to the lender, and they are more willing to overlook other issues when the borrower is putting up the bulk of the money for a property purchase.
Problematic Credit History
Your credit history plays a big part in the lending decision. Lenders will scrutinise your credit history closely before they offer you a mortgage. There are lots of reasons why your credit history might torpedo your application, and some of them are not obvious.
Having bad credit score will make it harder to get a mortgage, although not impossible if you apply for a bad credit mortgage. Most mainstream lenders won’t touch a customer with certain types of bad credit, so you may need to find a specialist lender if you want to apply for a mortgage. Online Mortgage Advisor can match you with a bad credit mortgage specialist, one that isn’t going to refuse you instantly. They specialise in working with non-mainstream lenders, so your chances of making a successful mortgage application are much improved.
No Credit History
Having no credit history can sometimes be almost as bad as having a bad one. Lenders want to see a good track record, so if you have never borrowed money before, it will be hard to persuade a bank to lend you £200k.
Payday Loans on Your Credit Record
Payday loans are marketed as a quick and easy way to borrow money, but they can kill any chance you have of taking out a mortgage. Most mainstream lenders view payday loans as a sign you are irresponsible with money. It might not kill your application completely, but if there are other problems, it definitely won’t help your chances.
Unresolved Debt Markers
Always check your credit report from more than one agency before you apply for a mortgage. There are plenty of people who have been caught out by a note placed on their credit file they knew nothing about. If you have ever missed a payment, make sure the note was removed. Something as small as missing a mobile phone payment because you thought the contract had ended could trip you up when buying a home.
Most credit reports are accurate, but it’s sensible to check yours before applying for a mortgage. Make sure there are no inaccuracies and that lenders have not confused you with someone else who has the same name – and likes racking up huge amounts of debt. It’s also a good idea to check regularly so you are not caught out by ID fraud, which will make it difficult to make a successful mortgage application.
You are Financially Linked to Someone with Debt Problems
Finally, be cautious about associating with anyone who has a poor credit history if you want to successfully apply for a mortgage. If you are making a joint mortgage application, ensure your partner doesn’t have debt you are unaware of or CCJs against their name. In addition, watch out for ex-partners still linked to your credit history – another good reason to check it before you apply.
Being self-employed makes it harder to get a mortgage, although having at least three years’ worth of proven income will resolve most problems. You will need to supply proof of earnings before a lender will consider your application. If you submit online tax returns, download the SA302 year-end form from your HMRC dashboard, or ask your accountant to provide a set of full accounts (these must be verified by a chartered accountant).
Most lenders will lend 4x or 4.5x your annual income but bear in kind they deduct existing debt payments from the figure. Some lenders will go up to 5x your annual income, but they are few and far between. So, if you earn £50,000 a year you can borrow around £200k-£225k, less your debt repayments.
Keep the lending multiple in mind when you view properties. Don’t put an offer in on a house you can’t afford, in the hope the lender will take pity on you and pony up the extra cash. They won’t and you’ll end up being disappointed.
Not on the Electoral Roll
Are you on the electoral roll? If not you won’t be able to borrow money. Lenders always check your identity and your address, and if you are not registered to vote, they can’t do that. It’s a small thing but a significant one.
You Haven’t Been Resident for Long Enough
Not being a UK resident (or a resident in whatever country you are applying for a mortgage) will also kill a mortgage application. Lenders will view you as a high-risk applicant if you have only recently moved here, so wait until you have been resident for at least three years before you apply.
Problems with the Property You Want to Buy
It isn’t always about you. Lenders won’t make a mortgage offer on a property that is overvalued or has serious structural problems. Mortgage lenders always insist on having a property surveyed, so they can be certain their investment is safe. If the property you have fallen in love with has a giant hole in the roof or was last lived in 50 years ago, don’t count on being approved for a mortgage.
There are lots of areas where mortgage applications fail, so it’s always worth working with a broker who can speed up the process and ensure you don’t apply for products you have no chance of being accepted for.