Applying for a mortgage can be a nerve-racking experience as it can feel like there are numerous pitfalls to the application process. Here at VA Mortgages we want to help you to maximise your chances of finding the right mortgage for you and ensuring your mortgage application is approved. In this article we’ll cover what impacts your eligibility for a mortgage to ensure you understand the criteria before you apply.
Why Would a Mortgage Application be Declined?
There are a number of reasons why a mortgage application might be declined. When assessing whether or not to grant you a mortgage lenders will be looking at how much you want to borrow; the size of your deposit; your credit history; your employment status; your income; your debt levels; any financial dependents, and your spending habits.
If you have already applied for a mortgage and had it declined don’t rush into another application, as each one could show up on, and affect, your credit score. Instead take the time to understand why it was declined so you can address any issues in your next application.
Some common reasons for a mortgage application to be declined include:
- Poor credit score
- Too much debt
- Too many recent credit applications
- Not being registered to vote
- Not considered to be earning enough to cover the mortgage repayments
- Too small deposit
- Not resident in the UK for long enough
- You are self-employed or a contract worker
Why Mortgages are Declined and What to do Next?
If you have already had a mortgage application denied or are concerned that you might get declined then you need to understand the reasons why and look at improving your future chances. Below we’ll go through some of the key reasons why a mortgage application might have been declined and how to improve your chances:
Poor Credit Rating
Mortgage lenders might refuse your mortgage application if you have a poor credit rating. If this is the case it is a good idea to check your credit rating yourself. You can contact credit agencies such as Experian, Equifax and TransUnion and ask to see a copy of your credit report.
Things that can affect your credit report include: missing credit card or mortgage repayments, bankruptcy, county court judgments (CCJ) or defaults on previous loans or debts.
Items usually stay on your credit file for at least six years, however lenders will look most closely at your most recent history, so if you can improve your credit score it will help any future applications.
There are a number of things you can do to improve your credit score, including:
- Check all your details on file are correct (especially your address history)
- Pay all your bills on time
- Clear any outstanding debts
- Check for any fraudulent activity on your account
- Make sure you are not linked to a family member who has bad credit rating as this may lower your own score
Your credit utilisation score shows how much of your available credit you are using. If you can borrow up to £1000 and have already borrowed £500 then your credit utilisation score would be 50%. Many lenders like to see a credit utilisation score of less than 25%.
Too Much Debt
If you have an existing large debt then your mortgage application could be rejected. If possible clear outstanding debts before applying. If you need some help and advice to consolidate and make a plan to clear your debt the Money Advice Service has a useful list of free and confidential debt advice services.
Too Many Credit Applications
Each time you apply for credit it gets logged on your credit report and if you apply repeatedly it can make it look like you have money troubles. To improve your chances of being approved for a mortgage it can be a good idea to refrain from applying for any other credit for up to 12 months beforehand.
Not Being Registered to Vote
Lenders like customers to be on the electoral roll so that they can confirm your identity and your current address. It’s really simple to register to vote and is an easy way to boost your credit score.
Not Earning Enough
Your mortgage application could be declined if the lender considers that you are not earning enough to cover the mortgage repayments. This can be avoided by discussing your financial situation with a mortgage advisor before you apply so that you can make sure you can afford the mortgage you are hoping to secure.
If you are a low earner you could look at shared-ownership schemes instead of opting for a full mortgage.
Too Small Deposit
If you only have a small deposit your mortgage application might be declined as many lenders like borrowers to have a decent loan-to-value ratio (LTV). Save as much as you can for a deposit before applying for a mortgage to give yourself the best chance of being approved.
Not Resident in the UK for Long Enough
If you’ve lived in the UK for less than three years you might need to show the lender your work visa and employment contract to prove that you have the right to live and work in the UK.
You Are Self-Employed
To secure a mortgage when you are self-employed you often need to show business accounts for the last two to three years. For more on mortgages for the self-employed read our guide here.
At What Stage Can a Mortgage Application be Declined?
A mortgage application can be declined at any time right up to completion, even after a mortgage offer has been produced although this will normally only occur if undisclosed information comes to light.
The first hurdle to overcome is securing a Decision in Principle. If you are declined at this early stage don’t worry, you can still go on to apply for a mortgage but first check your credit score and see if you can improve your application before applying again. A mortgage advisor can help you to navigate the mortgage application process.
If you secure a Decision in Principle but the mortgage is declined at the next stage then it was likely rejected by the underwriters. This could be for a number of reasons from technical errors to further analysis of the mortgage affordability.
Lenders and underwriters are risk averse so if they consider you to be a risky prospect then they may decline to approve your mortgage application.
What do Lenders Look for When Approving a Mortgage?
In general lenders are looking for an overall positive credit history, a reliable income and a low amount of debt.
One of the key ways they will assess your viability for a mortgage is by looking at your credit report.
Mortgage lenders don’t just want to know if you can afford the mortgage repayments now, they also want to make sure you will be able to continue to make mortgage repayments in the future too.
Will Mortgage Lenders Look at your Bank Account?
Yes, they may request bank statements. Lenders will also want to look at your income to ensure you can afford to make mortgage repayments. This can be the money you earn as your salary but can also include income from investments or government benefits.
You will also need to give details of your income on any mortgage application. If you are employed this usually means providing proof in the form of between three and six months of payslips.
Will Mortgage Lenders Look at Your Spending Habits?
Mortgage lenders might want to look at your spending habits to make sure you can afford to pay the mortgage. To assess this they might ask to see up to six months of bank statements.
If you consistently spend more than you earn then a lender might decide that you are too risky a prospect. Other spending habits that can cause a problem are gambling payments, pay day loans etc.
There are a number of reasons why a mortgage application might be declined but it is usually based on a customer’s credit score, income and levels of debt. To improve your chances of having your mortgage application approved it is advisable to consult a mortgage advisor who can steer you through the process.
Here at VA Mortgages we are an independent whole of market mortgage advisor. Contact our advisers today for a no obligation discussion about your circumstances.