Why do mortgage applications get declined?
This post has been written with contribution from WeBuyAnyHouse and the opinions provided within the content may not necessarily represent the views of Viewber Ltd.
Applying for a mortgage is a long process, and a lot of the time, first-time buyers aren’t aware of the things that they should do before they start the application to increase their chances of being accepted. Mortgage lenders have got strict criteria that needs to be met, and often, those applying don’t know what the criteria is, which results in a rejection.
We Buy Any House have looked into why mortgages get declined, and what you can do to avoid that.
1. Poor credit history
There are plenty of ways that you can check your credit score and find out if there are any issues, which you should do before you even think about applying for a mortgage. Popular online sites like ClearScore and Totally Money will analyse your credit file and give you your score, as well as some information about if it’s strong or not.
If your score isn’t very high, there are ways that you can look to improve it, but keep in mind that increasing it is a long-term task. Depending on how bad it is, it can take months or even years to build your score to a stronger number. If your credit is poor, you should:
- Make sure that any payments that you need to make are on-time moving forward; consistently late payments will knock your credit score and put mortgage lenders off you, as they will think that you’re an unreliable borrower
- Double-check all of your details and make sure that they’re correct, as if you’re still registered at an old address this can damage your credit score
- Confirm that you’re registered to vote in your area, as this can also cause damage and is easy to resolve
- Break any links with people that also have a bad credit score, as this can damage yours – this could be a shared bank account, or if you’ve taken out a joint loan with somebody in the past.
Spending some time building your credit score before you move forwards with a mortgage application will make a big difference and will help your chances of being approved.
2. A lower income than required
Generally, the maximum mortgage that you’d be approved for is 4-5x the annual income of the parties applying. If you’re buying on your own, this is just your salary, and if you’re applying with a partner, it’s your joint income, increasing the amount that you’ll likely be able to secure. With this in mind, a common reason that prospective buyers get rejected is because they’re applying for a mortgage that’s out of their price range, which will leave your lender concerned that you won’t be able to afford the repayments.
If you’re looking to apply for a mortgage that is over 4-5x your income, there’s a good chance that you’ll be rejected, so you should either:
- Look at mortgages that fit more comfortably within that price range
- Wait and apply if you know that your income is going to increase in the coming months.
Some lenders will be able to provide flexibility on this if you’ve got a very large deposit to put down, but this isn’t the most common situation for most first-time buyers, so it’s important to know that you’re applying for mortgages that are in your price range so you’re more likely to be accepted.
3. You’ve had multiple payday loans
A mortgage itself is another form of a loan, which is why lenders are so thorough with applications to ensure that they’re lending to people who present the least risk, and will be able to make the monthly mortgage payments with no problems. If you’ve had financial issues in the few years before you apply for your mortgage, they will probably show on your credit file and can be a big issue for lenders.
Payday loans are some of the worst loans to have on your credit file, as they’re visible for up to 6 years afterwards. These loans are frowned upon anyway as they tend to have huge interest rates and are meant to be very short-term – however, to lenders this looks like you struggle with your finances and makes you a risk to them, reducing the chance of them wanting to lend to you.
When you start to save your deposit to buy a house, you should assess your finances and your credit file at this point to see if you’re going to run into any issues when it comes to applying. It can take 4-8 years for most buyers to save their deposit, giving you plenty of time to build your credit and make yourself the best applicant for your lender.
4. Check your bank account
A lot of people don’t know this until they start the process, but when you apply for a mortgage, your lender will ask to see at least 3 months of your bank statements. This is a standard check to confirm that your income is what you’ve said it is, as well as analyse your money management skills.
If you know that towards the end of each month, you rely on your overdraft, this will flag up as an issue for your lender, so avoid applying until your overdraft is paid off in full and you no longer use it. It’s also worth being more aware of what you’re spending your money on in those months; while your lender isn’t going to reject you based on your purchases alone, if your statement shows some hefty buys in those three months that weren’t necessary, it can raise some questions for them about your money management skills.
5. Shop around
There are lots of different mortgages and lenders out there, so you should enquire with various lenders in the first stage to make sure that you’re getting the best deal possible. The interest rates are the thing to focus on here, as this can save you a lot of money over your mortgage if you’re able to secure a lower rate.
You can look at different lenders, but be aware – interest rates will differ depending on the applicant, and generally, lower rates will require a higher credit score and a stronger application. If you apply for a very low interest rate and get declined, it’s recommended to wait for 6 months to a year to reapply to ensure that your previous application isn’t hanging around on your credit file which can go against you. Even loan applications that have been rejected will leave a footprint on your file and can result in another rejection down the line if it’s too recent.
Applying for a mortgage is a big commitment, and making sure that you know these tips will help to increase your chances of approval and step onto the property ladder!