If you have made a mortgage application and been rejected, try not to panic. This is more common than you think. We have put together this guide to help you understand why you might have been rejected, and how to make sure it does not happen again.
There are many reasons why a lender may reject your mortgage application. While not all of these may apply to you, here are some common reasons for rejection.
As with every form of lending, be it bank loans or car finance, your credit score plays a part. If you have a poor credit score, this is an immediate red flag for lenders, telling them that you struggle to make repayments. This is often the deciding factor for many lenders, so make sure your score is healthy before applying in future.
When you make an application, the lender you contact will be able to see how many applications you have made. If you have made unsuccessful applications before, the lender may not look favourably on this one. If you currently have a large number of applications pending, this also casts a bad light on your eligibility.
Part of making a mortgage application is sending over details of your monthly finances, both incoming and outgoing. Based on this, the lender may surmise that you will struggle to afford the monthly repayments on the mortgage. Even if you have a good income, too much committed expenditure (such as loan repayments or other living costs) may make it a stretch for you to afford the mortgage, and the lender will turn you away.
If a lender learns that you have too much debt, this raises two red flags for your application. The first is that with your existing debt, you will struggle to afford the monthly repayments. The second is that in order to accumulate a significant amount of debt, you are not a reliable person to lend to. Lenders want to offer mortgages to people who have relatively small amounts of debt, and people that they can rely on to make monthly payments.
While paying back payday loans quickly might help your credit rating, it will not help your chances of your mortgage application being accepted. If you have a habit of taking out payday loans, your lender may see this as a potential issue with your finances. Additionally, if you are taking out a payday loan most months, you may be slapped with a large expense at the start of the month. Most mortgage payments are due at the start of the month, so if you have another variably large expense due at this time, this will raise red flags for your lender.
When you offer a deposit to a lender, this demonstrates two things. First of all, it shows your ability to save money and use it wisely, which is a necessary value of a reliable borrower. The second thing your deposit does is lower the amount that is being lended to you; the higher your deposit, the lower the loan. This gives lenders peace of mind when it comes to offering mortgages.
Unfortunately, people who are self employed or on zero hour contracts often struggle to get a mortgage. Even if sole traders demonstrate a high enough income, there is more risk involved than with people who are paid a salary. Even if this risk is only in theory, lenders are still more likely to look favourably on applications from salary workers. However, this does not mean it is impossible to get a mortgage if you are self employed, you will likely be asked to demonstrate your financial security in other ways.
If you have held residence in the UK for less than 3 years, lenders may still see you as a risk. Passing the 3-year mark tends to indicate - barring any extraordinary circumstances - that you are here to stay. If you are yet to pass that point, your lender may still be cautious that you might leave. This is why many newcomers to the UK spend their first 3 years renting and building up a good credit score. This then helps with any future mortgage applications.
Being on the electoral register at your current address is a prerequisite for many things in the UK, including your mortgage application being successful. This is one hurdle that newcomers to the UK sometimes run into. Make sure you register with the electoral register before applying for a mortgage.
If your application is refused, this should not have a negative effect on your credit score. Your credit score will keep track of the fact that you applied, but not that you were rejected. As we mentioned earlier, your applications will be tracked, so lots of applications will show up to future potential lenders. Your credit score itself will not be damaged, however.
The first thing you should do when your mortgage application is rejected is to ask for feedback from the potential lender. They will be able to highlight to you which of the above issues raised red flags on your application. You will then know what it is you need to work on for next time.
It is important to remember that just because this application has been refused, it does not mean that every future application will. You may have just not been the right fit for a certain lender, or changing circumstances may have forced them to change their criteria. Many people are disheartened by a refused application, thinking that if they have been refused once, this has written them off for good. This is not the case.
After speaking with the lender that refused you, you will know which aspect of your application you need to work on. Once you have done that, here are some guidelines you can follow to make stronger applications in the future.
Many mortgage applications are turned down because they have been filled out badly, and the biggest cause of this is rushing. When potential homeowners become anxious, they often fall into the trap of firing off mortgage applications as fast as they can. Not only does this show on your credit record, it also lowers the likelihood of any being accepted. A rushed mortgage application is rarely successful, so we recommend taking your time, and focusing on one lender.
When you start working with a good mortgage advisor, this whole process becomes so much easier. The mortgage advisor will collect all the details about you that they need, and scout the market to see which lenders are most likely to accept an application from you. Not only will they help find you an open lender, they will help to land you a great deal based on your finances. Using a mortgage advisor, you will avoid ever making a bad application, and your chances of acceptance will skyrocket.
You do not need to be a financial wizard or mega-rich to be a good prospect for lenders. A decent credit score, clear evidence of a healthy financial situation and a clean debt record is all you need to be considered by most lenders. Despite horror stories depicting tales of the mortgage market drying up, the reality is nowhere near as difficult. So many people who could realistically afford to buy their own home are put off by how hard they think getting a mortgage is. Avoid falling into this trap. Get your finances in a healthy state, and the rest will be a hundred times easier.
When you make your application, a lender will need to see your monthly expenses. If this report shows a large portion of your income is tied up in financial commitments, a lender is less likely to want to accept you. Simply by cutting your living costs can help rectify this. Shed those subscriptions to media services you do not 100% need. Reduce your premium gym membership to the standard package. Start shopping at cheaper supermarkets. Similar to the point above, these changes are not hard to make, but are avoided by so many people because they believe they are.
So there we have it, our guide to what to do if your mortgage application is rejected. The most important thing to bear in mind, is that a rejected application is not the end of the world. It does not mean a door has been closed on you forever. Simply follow the points that we have mentioned, and you will find it raining accepted applications. Okay, maybe not, but you will give yourself a much better chance.
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