As house prices continue to rise, many looking to get onto the housing ladder are finding they have to save for increasingly larger deposits. While saving for large deposits means that the majority of first-time buyers are in their 30s when they are ready to buy a property, what is less publicised is that after saving for a deposit, would-be first-time buyers could still be rejected for a mortgage.
Being rejected for a mortgage can be a devastating end to the dream of home ownership, but for those looking to apply for a mortgage this year, we’ve taken a look at the key reasons why mortgage applications are rejected and how to improve the chances of mortgage success.
The common belief that applicants will be offered a mortgage at three times their income is a myth and lenders now have a much more individual approach to assessing mortgage applications. This means that lenders will have different criteria when assessing an application, but all will be assessing whether or not the applicant can afford the mortgage repayments, including if the interest rate increases. To do this, a mortgage lender will likely request three months of bank statements, which will enable them to see the applicant’s income against their outgoings. The lender will want to make sure that even with mortgage repayments, the borrower will be able to repay other debts, pay their monthly bills, including their weekly food shop, and even have money left over for entertainment.
While the mortgage lender is not interested in how a borrower spends their disposable income, a few lifestyle choices can have a negative impact on a mortgage application. One red flag for mortgage lenders is if the borrower has a regular gambling habit. They may overlook the odd bet if it is placed using disposable income, but if the borrower is in debt and continuing to gamble regularly it could result in their mortgage application being rejected.
In fact, any lifestyle behaviour that could be considered irresponsible can result in a mortgage application being rejected. For example, clothes shopping regularly or going on expensive holidays while in debt can result in the mortgage application being turned down. Again, if these habits are done using disposable income with minimal debts, then they should not have an impact.
It should come as no surprise that a mortgage lender will be thoroughly assessing how the applicant manages their money when considering their application. If a payday loan, or a similar type of loan, has been taken out over the last 12 months, it could likely result in the application being rejected. Similarly, if the applicant is in a large amount of debt or has defaulted on debts within the last five years, it could result in the mortgage application not being approved. As well as this, unusual account activity, such as continuing shifting money between accounts owned by partners, can have a negative impact on the application.
When assessing whether to offer a mortgage, lenders will want to ensure that the borrower can afford the repayments and has a good track record of repaying debts. As such, the applicant must be realistic when house-hunting and opt for a property that is within their affordability range, while also making sure they have a good credit score. Simple steps, such as being on the electoral register and paying off debts can improve the chances of mortgage success. As well as this, in the six months leading up to the application, borrowers should consider their lifestyle choices and maybe put off big-ticket expenses until the house move has finished. Furthermore, being mindful about how everyday money is managed and making sure there is no unnecessary movement of money between accounts can help to improve the chances of mortgage success.
Eleanor Williams, finance expert at Moneyfacts, says: “Following the Mortgage Market Review, there has been a huge shift in how lenders assess potential borrowers. Rather than simply looking at income alone, lenders have a responsibility to assess the overall financial status and activity of applicants.
“This ensures that they are considering, not just your ability to meet the new monthly mortgage repayment, but also taking into account the crucial expenses we all have to meet – our existing credit commitments, childcare costs, even ensuring you budget for clothing, for example.
“By assessing bank statements, it also means that lenders are going to be aware of and consider how your finances are balanced at the end of each month, with the main concern being that you are not going into debt in order to fund your lifestyle.
“If you have any questions about what you could afford when taking on a new mortgage, speaking to a qualified, independent financial adviser will be vital.”
A mortgage broker can help you find the right mortgage for your individual circumstances and requirements. You can speak to mortgage broker here.
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.