Buying a home should be an exciting time. However, it’s often one that’s mixed with nerves too, especially when you submit a mortgage application and aren’t sure if you’ll be approved.
A rejection can set back your plans and may mean you miss out on a property you wanted to purchase. It could also have a long-term impact. When you apply for credit from a mortgage provider, it will leave a mark on your credit report that other lenders will be able to see. This can make it more difficult when approaching an alternative lender.
When you look at the number of people that are rejected by lenders, it’s easy to see why it’s a cause of concern for many. According to research from Which?, four in ten homeowners aged between 18 and 24 said they’d had a mortgage application rejected in the past. This compares to just 4% of those aged 60 or above. Unsurprisingly, given high property prices, London had the most mortgage rejections when looking at regions. Around three in ten homeowners across all age groups were initially rejected in the capital, compared to 11% in the South West.
There are many reasons why a mortgage application may be rejected. Understanding what the most common ones are can help present your application in a more positive light to potential lenders.
1. Poor credit score
Your credit score is incredibly important for not only being accepted for a mortgage, but the interest rate you’ll repay too. Lenders use your credit score to calculate how likely you are to meeting repayment commitments. A poor credit score, as a result, suggests to them you’re likely to default.
Before you apply for a mortgage, taking some time to check your credit score is important. It can help you identify potential red flags to lenders and remedy them before proceeding.
Lenders want to make sure that you’ll keep up with repayments. As a result, part of the application process will assess how affordable your monthly outgoings would be if approved. Typically, you will be able to borrow between three and fives times your household’s annual income.
If the size of the mortgage you want is not deemed affordable for your current income, it may be time to reassess your expectations. Other alternatives could include taking out a mortgage for a longer term, purchasing a shared ownership property or trying a specialist lender.
3. Failing stress test
In addition to seeing how affordable repayments would be now, banks are required to stress test your ability to repay. Following the 2008 financial crisis, banks must determine your ability to keep up with mortgage commitments if interest rates were to rise.
Interest rates are currently low and even a seemingly small rise could place pressure on family budgets. Take borrowing £150,000 over a 30-year mortgage term: with a 2.5% interest rate, monthly repayments would be £593. Should the interest rate rise to 4.5%, the monthly outgoing increases to £760.
4. Too many credit applications
When you apply for credit, a hard credit check is performed. This leaves a mark on your credit report, often for two years. Mortgage lenders will be able to see these previous checks when conducting their own.
This can affect your mortgage application for two reasons. Firstly, it can suggest previous credit applications have been performed and denied, indicating that you’re risky. Secondly, that you applied for credit and were approved, meaning you have the potential to increase debt liability.
Lenders look for stability when approving customers. Red flags that suggest instability, such as recently moving job, can lead to your application being rejected. As you prepare to apply for a mortgage it can be wise to hold off any big decisions or unusual spending until after it’s been accepted. Lenders will typically look at three-six months of bank statements and will often expect you to have finished any probation period at work.
6. The valuation is wrong
A common mistake is thinking that lenders only look at your personal situation. They don’t, the property you want to purchase also plays an important role.
The lender will want independent confirmation that the price you’ve offered for the property accurately reflects its value. If they believe the property is worth less than your offer, your mortgage application may be rejected. This is because they lend against the property, using it as insurance if you fail to keep up with repayments to recoup losses.
7. The property is unusual
Linking to the above point, the type of property you want to purchase will also have an influence. Put in an offer on a home that’s deemed unusual and you may struggle to be approved for a mortgage. If you are approved, you may find you’re expected to pay a greater deposit or higher level of interest. This is due to there being potentially less interest in the property when you decide to sell.
8. Your application
Your application contains the information lenders need to make an informed decision. A lack of details or errors on your application can lead to unnecessary rejection. It’s worthwhile carefully going over your application to double check it and getting at least a second pair of eyes to look over it too. Working with a mortgage broker can help here. As a mortgage professional, they’ll understand what a lender is looking for.
We’re here to help you throughout the mortgage process, whether you’re a first-time buyer or remortgaging your home. Our goal is to connect you with lenders that are most likely to approve your application and guide you throughout the process.