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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.
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. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.