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Are you planning to apply for a mortgage this year? If you’re worried about your application being rejected, you’re not alone. Yet, there are things you can do to improve your chances and secure the mortgage needed to purchase a property.
Unsurprisingly, those that had experienced credit problems in the last three years were particularly concerned. Some 70% of these adults were concerned about how their credit history could affect their application. Even if you’ve maintained a credit record, it can still be a worrying process. Understanding what lenders are looking for and taking steps to reduce red flags can give you a confidence boost.
Securing a mortgage offer
When you apply for a mortgage, the lender essentially wants to ensure you can consistently keep up with payments. This means looking at two key factors:
The first is your income compared to outgoings. Lenders will want to see evidence of your earnings and understand what your financial commitments are. This could include travel costs, loan repayments and much more. As a general rule of thumb, you can borrow 4.5 times your annual earnings to purchase a home. However, if you have a high debt to income ratio, you may find this is reduced.
The second is your credit history. This is where lenders will take a look at your past behaviour, determining how likely you are to default on payments. If you’ve missed payments or defaulted in the past, this will be a red flag, for instance. Lenders use your credit report to get an understanding of your financial behaviour.
A rejected mortgage application isn’t just disappointing for your immediate homeownership plans. It can have an impact on future applications too.
When a lender performs a hard credit search, this is marked on your credit report. It indicates to other lenders that you have either increased your accessible credit recently or have been rejected by another lender. Some lenders may reject your application on this basis. As a result, a rejection can have longer-lasting implications than you initially anticipate.
How to improve your chances of mortgage approval
1. Save an appropriate deposit
Before you start looking for a property to purchase, you should ensure you have a deposit in place. If you’re a first-time buyer, you’ll usually need at least 5% of the property’s value to act as a deposit and in some cases 10%. The bigger the deposit you have, the easier you’ll find it to secure a mortgage as your loan to value ratio is lower. Looking at the property market in the area you’d like to buy can help ensure you have an appropriate deposit target in mind.
2. Ensure your goal is realistic
How much do you want to borrow from a lender? Whilst a bank will assess your suitability to pay when applying for a mortgage, you should undertake some calculations of your own. How realistic is the goal and will repayments be affordable? If you’re asking to borrow an unrealistic sum, your application will be rejected. Whilst other factors play a role, how much you can borrow is linked to your salary.
3. Check your credit report
Ideally, you should check your credit report a few months before you want to apply for credit. This allows you to uncover any red flags and take steps to minimise them. A negative rating on your credit report doesn’t mean you’ll automatically be refused a mortgage. However, it may mean you need to consider different lenders or lower the amount you borrow, for example.
4. Improve your credit score
When assessing your credit report, the overall score is important. This will give lenders a headline figure to look at before delving deeper. Where necessary, you should take steps to improve your score. There are relatively easy wins that may be suitable, such as registering on the electoral roll, closing unused bank accounts and updating inaccurate information. Other steps can take longer to have an impact. The three main credit report agencies (Equifax, Experian and TransUnion) all offer free access to your own credit report.
5. Reduce debt
Reducing the amount of debt owed before applying for a mortgage is useful for two reasons. First, your outgoings will be lower, and you may, therefore, be able to borrow more money to secure your home. Second, it demonstrates that you’re able to repay credit and meet financial commitments.
6. Manage your outgoings in the months before
As part of your application, lenders may ask for previous bank statements to review. This typically covers the last three months. Lenders will take a look at your outgoings to assess spending habits. Carefully managing your money before applying for a mortgage can help to show your finances in a positive light. Lenders will also be looking out for key things on your statement that act as red flags, this includes gambling and the use of payday loans.
7. Consider the property
The property you choose will also be considered by your lender. They want to ensure that the property is worth the offer you’ve made and, that should you default, they’ll be able to sell it. For this reason, buyers using a mortgage will often need to avoid unusual properties or those requiring a large investment to make it attractive to the typical buyer. If you have your heart set on something that’s not traditional, it may be wise to research specialist lenders and work with a mortgage broker.
8. Get your documents in order
To approve an application, lenders will require numerous documents. Getting these in order and to hand before applying can not only speed up the process but gives you a chance to spot any mistakes that could affect your application. You’ll usually need to provide documents that confirm your identity and address, along with three months of payslips and bank statements. If you’re self-employed, you’ll need to show your accounts, often covering the last two to three years.
9. Choose the right lender for you
There are hundreds of different lenders to choose from, each lender will have its own criteria. Some will cater to people that are self-employed or have had credit problems previously. Just because one lender turns you down, doesn’t mean they all will. Choosing a lender that suits your circumstances can help secure your mortgage. With so many different lenders available, it can be difficult and time consuming to pick one. This is an area a mortgage broker can help with.
10. Work with a mortgage broker
A mortgage broker won’t just scour the mortgage market for a deal that matches you, as mentioned above. They can help ensure you have everything in order when putting together your application, as well as securing more competitive interest rates. Choosing to use a mortgage broker will often mean paying a fee. But when you look at the amount saved over the length of your mortgage due to lower interest, it could certainly pay off in the long run.
