Are you dreaming of owning your own home in the UK? From credit scores to employment history, we’ve covered nine potential hurdles standing between you and approval from a mortgage lender.
Poor Credit Score
A poor credit report is one of the main things that can stop you from getting a mortgage in the UK. Lenders check your report through various credit reference agencies to assess how likely you are to repay a loan, and if you have a low credit score they may not offer you a mortgage at all. It’s important to keep track of your credit score, and you can do so via platforms such as Checkmyfile.
There are a few things you can do to improve a poor credit score, such as making sure you keep up with all your repayments, including any credit cards or loans you have. You should also try to reduce your overall level of debt, and if you have any county court judgments (CCJs) against you, it is generally best to pay this off prior to an application, but your mortgage broker can advise on this.
Insufficient Income
If you don’t earn enough money, you won’t be able to get a mortgage. Mortgage lenders will want to see that you have a regular income and can afford to make monthly mortgage repayments. They’ll also want to know how much money you have coming in each month after taxes and other deductions.
If you’re self-employed, it can be even more difficult to get a mortgage because lenders will want to see proof of your income. They’ll generally want to see at least two or three years of accounts, however, it is possible to get a mortgage with just one year’s accounts using an experienced mortgage broker. The lender may require a larger deposit than if you were employed by someone else.
Lack of Employment History
If you have been unemployed for a long period of time, or if you have had a number of jobs in a short space of time, this can be a problem. Lenders want to see that you have a good employment history and that you are likely to continue to be employed in the future.
You should save your payslips so that mortgage lenders can view them on request. At least 3 will be required plus proof that the salary has gone into your bank account.
High Debt-to-Income Ratio
One of the things that can prevent a mortgage approval is having a high debt-to-income ratio (DTI). This means your monthly debt payments are high in comparison to your monthly income. Lenders will look at your debt-to-income ratio to determine whether or not you can afford to make your mortgage payments each month. If your ratio is too high, it may be difficult for you to get approved for a loan.
Your DTI is basically what you earn versus what you spend. You can calculate this by dividing all your monthly debts by your gross monthly income. A DTI of less than 43% is considered acceptable and below 35% is good.
There are a few things you can do to lower your debt-to-income ratio, such as paying off some of your existing debt or increasing your income. If you’re not sure what your debt-to-income ratio is, you can use an online calculator to figure it out.
Insufficient Deposit
If you don’t have a large enough deposit, you won’t be able to get a mortgage in the UK. The deposit is the money you put down as a percentage of the property’s value, and it must be at least 5% of the purchase price, many lenders want a 10% deposit. If you’re looking to buy a property worth £200,000, then you’ll need a deposit of at least £10,000.
There are a number of ways to raise your deposit, such as:
Saving up over time
This is the most common method used by people who are looking to borrow money to buy their first home. It can take years to save up enough for a decent deposit, so it’s important to start as early as possible.
Using equity from another property
If you already own a property, you may be able to use some of the equity (the portion of the property you actually own) as your deposit for your new home. This can be done by either taking out a second mortgage on your current property or selling it and using the proceeds as your new deposit.
Getting help from family and friends
Another option is to ask family and friends for help with your deposit. This can be in the form of a loan or gift, but make sure any agreements made are in writing to avoid any future fallout. Furthermore, document where the deposit came from. Mortgage lenders have strict rules to adhere to with respect to money laundering checks.
Shared ownership mortgages
A government-supported scheme such as shared ownership might be another way of getting around not having a large enough deposit.
Unstable Employment Sector
Some employment sectors in the UK are notoriously unstable, with constant changes in the job market and a high rate of unemployment. These include construction, hospitality and the gig economy. If you work in one of these areas it can be difficult to get a mortgage, as most lenders will want to see proof of stable employment before they approve a loan.
If you’re self-employed, this can be even more difficult, as you’ll need to have consistent income and provide detailed financial records to show mortgage providers your income is consistent. Lenders will also be looking for a strong credit history, so if you have any missed payments or defaults on your record, it could stand in the way of getting a mortgage.
Failing the Mortgage Affordability Assessment
One of the most important factors in getting a mortgage is your affordability assessment. This is basically a test lenders use to determine whether or not you can actually afford the mortgage payments.
There are a few different things that go into this assessment, but one of the most important is your income. The lender will want to see proof of your income and make sure it’s enough to cover the mortgage payments. They’ll also look at your other debts and financial obligations to make sure you can still afford the mortgage even after making those payments.
Mortgage providers will apply an income multiple to your earnings. Some providers will lend 4.5 times your income, others will go to 5 and a few might stretch to 6. Therefore, if you’d like to borrow £300,000 applicants would need a combined income of between £50,000 and £66,666.
If you’re concerned about your ability to pass an affordability assessment, there are a few things you can do to improve your chances. First, make sure you have all of your financial documentation in order so the mortgage lender can easily see proof of your income and debts. It would help if you also tried to improve your credit score before applying for a mortgage.
Previous Financial Issues
If you’ve had financial problems in the past, it can be difficult to get a mortgage. Lenders will look at your credit history and may be hesitant to approve you for a loan if they see you have an unpaid utility payment, missed credit card payments, have county court judgements, used payday loans or have previously been in debt. However, there are a few things you can do to improve your financial situation and your chances of getting a mortgage, even if you have a bad credit history.
First, try to clean up your credit report. This means paying off any outstanding debts and making sure all of your payments are up to date. You can also try to negotiate with your creditors to have negative items removed from your report.
Another option is to look for a lender and mortgage broker who specialises in bad credit mortgages. These specialist lenders are more likely to approve you for a loan, although the interest rates may be higher than average.
You may also want to consider saving a larger deposit if possible. This will show lenders you’re serious about buying a home and have the financial resources to do so. It may also help you get a lower interest rate on your mortgage.
Lack of Documentation
When lenders are assessing your mortgage application, one of the things they’ll look at is your documentation. This includes things like your proof of income, employment history, credit rating, and address history. If you don’t have enough documentation to support your application, it could be declined.
Even though lenders are really diligent when assessing your mortgage application, there are lots of different options out there. The thing to bare in mind is that lenders will want you to be able to demonstrate that you can manage your money properly now, even if you have had a blip in past. The longer you can prove that, the more chance you have of getting your mortgage approved. If you’re worried about not being approved for a mortgage, my advice is to get in touch with a mortgage adviser in plenty of time so that you can make a plan to get your finances in the best shape possible.
Mike Plaster, Mortgage Advisor, Millennium Mortgages
Conclusion
Getting a mortgage in the UK is no easy task, and with so many pitfalls it can be easy to become overwhelmed. By familiarising yourself with these 9 hurdles you can avoid any surprises when applying for your loan and have all the paperwork prepared in advance.
While some of them are out of your control, like age or earning capacity, there are still plenty of ways to make sure you put together a competitive mortgage application and get the best deal possible. Once you’re ready to apply a professional mortgage broker like Millenium Mortgages can help you navigate the process.
The information contained within was correct at the time of publication but is subject to change.
Mike Plaster is CeMap qualified CAS status Mortgage and Protection Adviser able to assist on both Residential and Buy To Let Mortgages as well as Life Insurance, Critical Illness Cover and Income Protection.