What do mortgage lenders look for in a first-time buyer?

If you’re a first-time buyer, navigating the challenges of securing a mortgage can be complicated. Taking the time to understand what mortgage lenders are looking for, and how to demonstrate you fit the criteria can help make the process smoother.

Your mortgage application being rejected not only has an impact on your immediate plans, such as halting your ability to purchase a home, but can affect your future in the medium term too. A mortgage application will show up on your credit report, potentially putting off other lenders and lowering your credit score. As a result, understanding the process is important.

Research from Which? shows that one in six homeowners with a current mortgage has been rejected in the past. The figure was highest among younger generations, with 41% of those aged between 18 and 25 facing rejection, compared to just 4% of those aged 60 and above.

On top of the age difference, the findings also highlighted the difficulty of getting on the property ladder in the capital. Almost three in ten homeowners in London had experienced rejection, the highest percentage across all regions. Given the high property prices in London, it’s perhaps unsurprising that more aspiring homeowners are finding their mortgage application is turned down.

So, if you’re worried about how your mortgage application will be received, you’re not alone. Luckily, there are key things that lenders look for and steps you can take to improve your prospects of securing the mortgage to buy your first home.

Reliability: Lenders want customers that will consistently meet their mortgage commitments. One way they assess this is by looking at your credit report. If you have any defaults or outstanding debts showing up on your report, it may be worth waiting for them to be removed before you apply. Generally, improving your credit score can give you a boost in the right direction too. Steps, such as registering on the electoral roll, reducing credit card debt, and getting rid of mistakes, can help.

Debt-to-income ratio: Outstanding debt can be off-putting to a potential lender. Firstly, it indicates that you may live outside of your means, and, secondly, you’ll have more financial commitments when taking on a mortgage. Where possible, pay off debt before applying, particularly high-interest debt such as credit cards. Payday loans are often an instant red flag to lenders too, if these show up on your credit report or bank statement, you could be rejected, even if you meet all other criteria.

Affordability: One of the key things lenders look at is affordability. They want to ensure that you’ll be able to meet repayments. As a result, understanding your budget and searching for a home that you can realistically afford is important. Lenders will often look at three months of bank statements during the process, so reigning back unnecessary splurges can help too. Since the financial crisis a decade ago, lending criteria has become more stringent. It means lenders will stress-test your ability to continue meeting repayments even if interest rates, and therefore your repayments, increase.

Employment status: Proving that you can afford mortgage repayments isn’t enough. After all, a mortgage is a long-term commitment that usually spans decades. As a result, lenders will want to check your employment status too. Being permanently employed full-time is preferable. However, that doesn’t mean you can’t secure a mortgage if your employment status is different, though it will usually mean more paperwork. If you’re self-employed, for example, providers will typically expect to see three years of accounts. If you’re worried that your employment status will affect your mortgage application, please contact us.

Deposit: The level of deposit you have will play a role in securing a mortgage. The bigger the better, but most lenders will expect you to have at least 5-10% of the property’s value to put down as a deposit. If you’re struggling to raise this amount, the good news is there is an increasing number of 100% mortgages available, aimed at first-time buyers, as well as specialist lenders. Searching the mortgage market for the best providers for you can be challenging, this is an area we can help with.

Other assets: If you have other assets, such as savings, this can help sway the lender in your favour too. It shows you have something to fall back on should you experience a financial shock, putting you in a more secure position.

Down valuation: Even if you tick all the boxes on the application, you’ll still be rejected if your lender believes the property you want to buy isn’t worth the offer you’ve put in. Your provider will want to be able to recoup losses if you don’t keep up with mortgage repayments through the sale of the property. If you’ve paid too much for your home, they may not be able to do this.

If you’re searching for your first home and want expert support throughout the mortgage process, please contact us. We’re here to give you the best possible chance of securing a mortgage that suits you at a competitive rate.