Top financial mistakes that could hurt your mortgage application

You’ve finally come to a place in your financial journey where paying rent to ultimately pay off someone else’s mortgage …

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Source: Getty Images

You’ve finally come to a place in your financial journey where paying rent to ultimately pay off someone else’s mortgage just doesn’t make sense any more. As you tally up the monthly rental bills since you decided to move out of your parents’ house, you realise that your sudden streak of wild independence is costing a bit more than you’re comfortable with. In fact, you’re quite annoyed that all this rent-payment money could have, at the very least, totalled a handsome deposit on a property, and maybe even knocked a few years off your mortgage payments by now. You dub this a high price for freedom and decide that your journey as a renter ends here. So you do what any reasonable renter would do: you start house hunting.

The only thing is, securing a mortgage isn’t going according to plan. You’ve done your homework and know that a longer term could be costly, as could a high rate, but somehow you’re still struggling to land a good mortgage deal.

Where could you have gone wrong? Discover four of the most common reasons why mortgage applications fail.

You’re blissfully unaware of your destructive credit behaviour

A few late payments here and there don’t hurt anybody, do they? The bank got its money, didn’t it? 

It turns out that your payment profile forms a large part of your credit score. Lenders use your credit score as a major component in their decision-making process. A credit score reveals a lot about our spending and credit behaviour, not just our ability to service our debt. While the credit bureaus may not have any major derogatory details listed such as county court judgements, individual voluntary arrangements, or bankruptcy, even minor infringements such as skipped or late payments have a negative impact on your score.

Credit bureaus can provide you with a free credit report once a year.

If you need help to improve your credit score, you may want to enlist the services of a reputable credit repair company. While resolving the detrimental items on your credit report will take some time, it’s worth increasing your score to get a better deal on your mortgage.

You sometimes let your bank account dip into the negative

You may take care of your financial commitments such as debt repayments, but when it’s time to pay for all those subscription services and insurance products, you draw cash out of your account faster than Tesco decorates its stores for the holidays.

If a transaction forces your account into a negative balance and the bank decides to honour the transaction, it might not show as a returned item on the account but it will affect the bank’s internal rating. This rating helps banks create specialised offers for their clients without the need to access credit bureaus. However, for clients, this internal rating could result in a negative outcome on their mortgage application. This rating is affected by dishonoured items on your account, unauthorised excesses, whether the account is dormant (i.e. unused), and even how you use the bank’s credit products.

If a payment is dishonoured (i.e. refused), it not only affects the internal rating negatively, but can also serve as a reason for finance to be declined. Dishonours on an account can suggest to a credit provider that the account holder can’t manage his or her accounts properly or is over-extended. Even if your mortgage is approved, you may have to contend with a higher interest rate.

Your co-applicant is bringing the rating down

It takes careful money management and a keen eye for terms and conditions to keep a credit score above what credit bureaus consider as good or excellent. You’ve done the work and now it’s time to get the interest rate you deserve. You work through the various tabs for the online mortgage application and once you’re happy with the information provided, you click the submit button… But the result is not what you expected. The screen flashes an instant decline. An unsatisfactory credit bureau listing is the reason for the decline.

As it turns out, your co-applicant forgot he or she had a credit card, used it once and only paid back the usage but never the interest and annual card fees. Hence the record for this card has done quite some damage to your co-applicant’s credit score.

Before applying for a mortgage, make sure that all applicants are not only able to afford their responsibility towards the mortgage, but also have their credit score in order, so you benefit from a good interest rate.

You have too much credit available

You’re just too darn good with your credit. In fact, Barclays seems to think so. And so does American Express. Visa sends you complimentary tickets to Elton John concerts. In fact, you have so much credit available on your credit cards that you could purchase a small island. But that makes financial institutions nervous.

If you had to access all that credit, would it put your finances under pressure? If the answer is yes, then you need to cancel some cards or drop some limits to get within a reasonable range. Not only will this improve your chances of getting mortgage finance, but it will also help you secure the best possible interest rate.

In conclusion, here’s what you should be looking at

It’s important to tick a few boxes before applying for that first mortgage, in order to get the best deal possible. For applicants, good financial management extends beyond just paying debts on time. You need to manage your other financial obligations well, too, and keep a tight lid on over-extending your accounts or agreeing to automatic credit limit increases.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »