Have you been turned down for a mortgage? Dave Woodbridge explains what you need to do to turn that ‘no’ into a ‘yes’
Whether it’s a first time purchase or a new mortgage, having a lender say “no” to your mortgage application can be overwhelming. It can also be confusing if you don’t know why you were rejected.
The cost of living crisis is having a huge impact on the finances of some borrowers.
Rising fuel, energy and food prices are further weighing on borrowers’ spending; leaving less money at the end of the month to meet mortgage payments.
On the bottom of rising interest rates, most Britons do not see their salaries increase in line with rising costs. A supplier’s decision to refuse to lend to you may be a byproduct of the impact of rising costs on your affordability.
Yet just because one lender has turned you down doesn’t mean others will. Knowing the potential reasons for rejection and seeking guidance can help you turn that “no” into a “yes.”
Why Lenders May Reject a Mortgage Application
First, a lender needs to be confident that you can afford your repayments and the first thing they will look at is your income. As a rough guide, most lenders will offer you around four to 4.5 times your annual income, on an individual or joint basis.
With the average house price after rising 10.5% over the past year, falling into this multiple income bracket is increasingly difficult for many hopeful borrowers.
Most lenders lend up to 95% of a property’s value, but if that’s out of reach, you may need to save up for a larger deposit.
In addition to your income, lenders will also assess your expenses – aka your monthly financial commitments – with some providers already starting to factor the rising cost of living into their affordability calculations.
If you already have major expenses or loan repayments, this could work against you, especially if you’ve missed payments.
What can you do if you’ve been rejected for a mortgage?
Most borrowers have already started to tighten their belts in response to the rising cost of living, but if you haven’t already, now would be a good time to cut any unnecessary spending.
Borrowing beyond your means is a huge red flag for lenders. As day-to-day costs continue to rise, there are also fears that growing numbers of Britons are turning to unsecured credit and payday loans.
Bank of England figures show £0.4billion was spent on credit cards in May, 11.2% more than the previous year, while TSB research found nearly a quarter of Britons were dipping into their savings to cover essentials such as food.
If you are concerned about outstanding loans, seek advice. Speak with a mortgage consultant early on to highlight any issues before applying to a mortgage lender.
Another essential piece of information that lenders will base their decision on is your credit score. This indicates whether you have successfully repaid previous loans over the past six years and whether lenders will be looking for a good score, so it is essential that borrowers take all possible steps to build a better credit history.
One of the easiest and fastest ways to potentially improve your score is to check it online for any inaccuracies. The problem may not be you, but a joint account with an ex-partner or roommate. If so, you should write to the credit reporting agencies and ask for a “dissociation” notice.
While too much credit can be bad, so can too little — especially if it results in a repayment history that lenders don’t have to assess. Borrowers can seek to improve their credit score by spending a little on a credit card and paying it off on time each month.
Another simple but effective way to boost your credit score is to register to vote through your local council, as lenders will sometimes use this to verify your identity.
Why it’s best to seek mortgage advice
If your mortgage application has already been declined, it’s best not to reapply to another lender just yet, as this could show up on your credit report. Instead, speak to a mortgage broker for advice and guidance, especially in the face of current economic uncertainty.
Each lender has different criteria, and a mortgage advisor might be able to direct you to a lender that’s better suited to you and more likely to say yes.
By Dave Woodbridge, Linear, LSL Financial Services