Unless you are extremely wealthy, you will need a mortgage to buy a home. However, when you apply, there is no guarantee that you will be accepted. Read on to find out about seven things that could stop you from getting a mortgage.
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1. Bad credit history
The application process for a mortgage is the same as that for any other financial product. The lender will check your credit record and could refuse your application if they don’t like what they see.
It’s a good idea to check your credit report before making an application. There are three credit reference agencies that are checked by mortgage lenders, namely Equifax, Experian and TransUnion.
You can check your credit score for free, but you can also register for a 30-day trial and receive a credit report.
2. Too many applications
Every time you apply for credit, the lender will make what is known as a ‘hard inquiry’. This type of inquiry leaves a footprint on your credit record.
Excessive footprints on your record is a red flag for lenders because it gives the impression that you might have financial problems.
3. Too much debt
When thinking about the factors that can stop you from getting a mortgage, it comes as no surprise that too much debt is a big one.
A mortgage is a major long-term financial commitment, and a lender is unlikely to accept an application from someone unable to keep their debts to a minimum.
4. Payday loans
The presence of a payday loan can severely damage your credit score. Credit reference agencies have started to list payday loans separately from any other debts. As a result, they are clearly visible to a lender undertaking a credit check.
Even if you have recently paid one off in full, chances are you will be refused a mortgage application if the lender sees a payday loan on your report.
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5. Not enough income
Arguably, if the lender refuses your application because you don’t have enough income, it’s a case of being cruel to be kind.
If you don’t have enough money coming in, you may struggle to make the mortgage repayments. This can be the beginning of a slippery slope if you are not careful, which could put your home at risk.
In this situation, any responsible lender will refuse your application and stop you from getting a mortgage.
6. Insufficient deposit
It is unlikely that your application will be accepted if you have a deposit of less than 10% of the market value of the home you want to buy.
House prices increase over the long term, but they can rise and fall along the way. If you have a smaller deposit, you have less protection against any market volatility and the value of your home could fall below the amount of the mortgage.
If you are in this situation, known as negative equity, and you want to sell, the amount you will get from the sale of your home will not be enough to pay off the mortgage.
For this reason, lenders put a limit on the amount they are prepared to lend relative to the value of the property. This is known as the loan to value.
The good news is that thanks to the government’s new Mortgage Guarantee Scheme launching in April, you can now get on the property ladder with a 5% deposit. This is because the UK government will guarantee a portion of loans worth up to £600,000.
7. Errors on your application
Take your time when filling out the forms and double-check all the facts before submitting your application. Make copies of all of the paperwork so you can refer back to it if there is a problem.
What you can do if you have been refused
Unfortunately, a lender may not give you a specific reason why your application was refused. However, they may tell you if it relates to your credit record.
If the problem is your credit record, the first step is to get credit reports from all three agencies.
When thinking about what stops you from getting a mortgage, you need to look at it from the lender’s point of view. A lender will want to see a credit report that shows you are good with money.
This means minimal outstanding debts, no records of payday loans and no searches undertaken by other lenders. You may need to consider working on improving your credit score before you try again.
Take home
If your mortgage application has been refused, don’t get disheartened. Give yourself time to improve your financial situation if necessary.
If you need to improve your credit record, use the time wisely. You could also use the time to increase the size of your deposit or to build up an emergency fund.
