Tips For Getting A Mortgage
Homeownership is a goal for many UK adults, but many feel that it is out of their reach. Owning your own home is about more than just being able to paint the walls, update the bathroom or build an extension.
When you own your home, you are investing in your future. Your monthly payments pay down your principal loan and your interest. This can be an excellent way to save for your retirement, as you can sell the home when it has appreciated in value and move into a smaller property.
Many people wonder if they have any chance of securing a mortgage. The most common reasons that people believe they are ineligible include:
If you’re wondering if you have a chance at getting a mortgage, read on to discover how lenders make decisions and how you can increase your chances of securing a mortgage.
Lending criteria for mortgage
Lenders will look at several factors when considering your mortgage application. By taking into consideration different aspects of your application, they can get a more complete picture of your financial situation. This allows the lender to understand the risk associated with lending to you.
All lenders want to minimise their risk as they lose money when a borrower defaults on a mortgage. It takes time and resources to repossess and sell a home, so they want to lend to the people who are most likely to be able to make their payments on time every month.
Lenders will look at the following factors when making a decision about your mortgage application:
- Your income and employment
- Your monthly expenses
- Your deposit
- Credit score and history
- The property and value
If you fall short in one category, it might not rule you out entirely. Instead, you might find that you are offered a loan at a higher interest rate. This allows lenders to control their risk, as borrowing will cost you more money.
How to increase your chances of getting a mortgage
There are a few red flags that lenders look out for. These include poor money management, evidence of repetitive gambling, a small deposit and sporadic work history. There are steps you can take to make each of these factors less damaging to your application.
When submitting your application, you will need to provide three months of bank statements. This has to be the primary bank account your salary is paid into. For three months, try to take control of your spending and make sure you aren't running low on funds towards the end of the month. You should also avoid borrowing money from friends or family.
Your credit score and history will also be scrutinised. Make sure everything on your credit report is up-to-date and accurate. Close any unused credit accounts so that they no longer appear on your report. You should also avoid making any credit applications in the three months leading up to your mortgage application. Hard credit searches will appear on your report and can put lenders off.
If you are self-employed or work as a contractor, avoid making your application when you are between roles. Lenders want to see stability in your income. If your income fluctuates every month, consider opening a business account and then paying yourself a set “salary” on the same day of every month.
While you might feel confident in your ability to make payments every month, lenders prefer to see stability and predictable income. This is why mortgages for self-employed buyers often come with increased scrutiny.
What to do if you are rejected for a mortgage
Having a mortgage application declined can knock your confidence, but don’t allow this to derail your plans entirely. Speak to a specialist mortgage advisor or broker to find out what is likely to have gone wrong. You can then create a plan to address the issues.
If your deposit is simply too small, you may need to continue saving or explore the help to buy equity loan scheme. You could also set your sights on a lower value property. This will effectively boost the value of your deposit by making your LTV smaller.
If you are rejected for a mortgage application, wait a few months before trying again. Your mortgage application will appear on your credit report as a hard search so this can be a red flag for other lenders. It is also very unlikely that you will be able to fix any issues with your application in under three months.
A typical mortgage application will look at your income, expenses, deposit and credit history. Lenders may also stress test your finances to see if you will be able to afford the mortgage repayments if your circumstances were to change. If you’re concerned about being accepted for a mortgage, speak to a specialist advisor to explore your options.