If you have recently had a mortgage application rejected or are concerned about being declined, then this guide is for you.
Mortgage rejections do occur all of the time and for many different reasons. If this happens to you, it doesn’t mean you won’t ever be able to get a mortgage.
Before reapplying, it’s important to take some time to find out the reasons why.
In this guide we look at why mortgages are rejected, the most common reasons, what to do next and where to go for advice.
Why have I been refused a mortgage?
Most of the time mortgage applications are rejected because the borrowers didn’t meet the lender’s specific criteria.
If you have been turned down by your bank, it doesn’t necessarily mean that you can’t get a mortgage, just that you need to find a more suitable lender.
When you send in your application, the lender will look at your credit report, your employment details and your affordability, amongst many others.
If any of these don’t align with the lending criteria then it could lead to a declined application.
The high street lenders like Barclays, Lloyds, NatWest etc usually have quite rigid lending rules.
Some common reasons
Let’s take a look at some of the more common reasons why mortgages are declined
Not earning enough
If you cannot prove that you earn enough to afford the mortgage payments then your mortgage application will be declined. Occasionally this is because of simple errors: You accidentally put down your net income when the lender needed gross income.
If your income is simply too low then you will be rejected, or offered a reduced loan amount.
The rejection could be related to how the lender uses an income multiple. These differ between lenders and change with different loan to value percentages.
A common problem here is when a self-employed contractor’s income is assessed based on their SA302’s, when they need a contractor friendly mortgage lender to calculate using their gross day rate.
Lenders also look at your debt-to-income ratio. This compares your debt repayments to your gross earnings. If it’s too high then the loan could be rejected. You will also find that your maximum borrowing capacity is less if you have debt repayments.
Wrong type of mortgage
There are various types of mortgages available, and all have a specific use and purpose.
If you applied for a first time buyer mortgage but you’ve previously owned a property, then your application would be declined. Or you are trying to obtain a residential mortgage for a property that will be let out, such as a holiday let or buy to let.
Residential mortgages are for your own home, the right type of mortgage would be a holiday let mortgage or buy to let mortgage.
Problems with the survey
The lender will want to carry out an inspection of the property, including a valuation for mortgage purposes.
Surveys can throw out all sorts of issues, from structural problems to down valuations. If the property is not watertight and cannot be lived in, then most lenders will reject it, on the basis that it is uninhabitable. They could have found japanese knotweed, or a construction type that they don’t accept.
Wrong type of property
The majority of mortgage companies want to lend against buildings made from traditional materials; brick walls and tiled roofs. Also, the properties need to be easy saleable in the event of repossession.
This means that if you want to buy an unusual property, or one built using a non-standard construction method, you need to find a willing lender who offers a specialist property mortgage. Barn conversions, properties with an annexe, large acreage, flats above shops, will all need more specialist finance.
There are also some lenders that are wary about a history of subsidence, even if this has been remedied. That means matching the property to a lender that offers an underpinned property mortgage.
Poor credit history
Alongside your income, your credit history is another vital factor when applying for a mortgage. It shows the lender what credit you have, what you have applied for and how well you manage the repayments. Negative entries like defaults, late payments or CCJs are referred to as subprime, and will lower your chances. Before applying for a mortgage it’s always a good idea to get a copy of your credit report and check it for any errors. There are 3 main credit reference agencies in the UK and lenders use different ones, so check your profile for all 3.
Too many recent credit applications
Making too many credit applications close together will give the lender some cause for concern.
They may determine that you are either overstretching your finances, or struggling to get accepted for credit. Either way, it’s not good for a mortgage application. Where possible, don’t apply for any new credit in the 12 months prior to getting a mortgage.
Not on the Electoral Roll
Lenders look to the electoral register to confirm your identity and that you live at the address on your application.
If you are not registered then it is a lot harder to obtain a mortgage. Check your credit report and if you’re not registered on the electoral roll, at the right address, do so right away.
Payday Loans
Whether you need a mortgage, or not, Payday loans are to be avoided. They are hugely expensive and stay on your credit file for six years. Evidence of a recent Payday loan could cause certain lenders to reject you.
Deposit and LTV
The size of your mortgage deposit affects your loan to value percentage, and vice versa. All lenders have maximum LTV limits in place. If you get your sums wrong then it’s possible to apply for an incorrect size mortgage, or choose the wrong lender.
DTI ratio
Having too much debt will affect your ability to get a mortgage. As will permanently being overdrawn and always using your credit cards right up to the limit.
Lenders use a debt-to-income calculation to see how much of your gross income is committed to debt repayment. If this is too high then you could get declined, or offered a lower mortgage.
Wrong lender
All lenders have their own individual lending criteria, and this sets the framework for the type of mortgages, and borrowers, they want as a customer.
It is possible to choose the wrong lender, and this could well lead to a rejection. For example: You may have a CCJ for £300 that was registered a couple of years ago. You apply to a lender because you believe they accept CCJs. This is true, but they only accept CCJs up to £200, so your application is rejected.
Residency status
If you have lived in the UK for three years or less, many lenders will not be willing to grant you a mortgage. They will certainly want to check your UK residency status.
But also they will only have limited information on your credit arrangements, as your credit report will only have three years of data.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Find out why your application was rejected
Go back to the lender and ask them for more information. They might not give you all of the details you need, but it’s worth a try.
It’s a good idea for each borrower to get a copy of their credit report. Go through these carefully and look for errors, or perhaps identify issues with debt.
Each lender has a different tolerance to items that could appear on your credit file. It’s therefore important to match your credit status to a lender.
If you spot any errors then get these fixed asap.
If the problem is because you don’t meet that lender’s criteria, either because of bad credit or something else, then you need to find a more suitable lender.
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Don’t reapply straight away!
Now, whether you found out why your application was declined, or not, it’s important not rush and reapply straight away.
Making lots of mortgage applications close together will lower your credit score, incur extra mortgage fees, and limit your choices. And it doesn’t look good on your report.
How soon can you reapply?
There’s no fixed answer to this, or set period of time. It all depends how quickly you identify and correct any issues.
If you really need to apply for a mortgage soon after, then we would suggest speaking to an independent mortgage broker.
Before you do anything!
They will undoubtedly ask to see your credit report and all of your financial paperwork. Based on this they will be able to recommend a new lender. At this point it’s probably a good idea to get a decision in principle (DIP), first.
A Decision in Principle is like a ‘mini’ mortgage application and your broker can help with this. You request a DIP from a specific lender and they carry out some basic checks which will include a soft credit search. This gives you a good indication on whether the lender will accept you, without impacting on your credit score.
If the DIP comes back positive then you can make a full application with that lender. (Just remember that a DIP is not a guarantee of acceptance).
Putting things right
Once you know the reason/s for being declined, you can take some steps towards fixing them.
Where there are errors on your credit file, these should be addressed immediately. Contact the lender concerned, or approach the credit reference agency direct. Corrections can take a while before becoming ‘live’.
If you weren’t showing up on the electoral roll, get yourself registered as soon as possible.
If the problem is a low credit score then this can take some time to improve. Pay all of your bills on time, don’t take out anymore credit, and keep within your existing limits.
Saving up for a bigger deposit will also help as it lowers your loan to value (LTV) percentage (which lenders like).
Will being declined affect my credit score?
When you apply for a mortgage the lender will perform a ‘hard check’ against your credit profile. Your credit report will show that you applied for this mortgage, but it won’t show whether it was successful (or not).
Other lenders will be able to see this on your credit file.
While this single entry is unlikely to damage your credit score much, having a mortgage application declined tends to lead to more applications and more hard credit searches.
Multiple hard searches will lower your score, reducing the chances of being accepted.
You can avoid this situation by:
- Waiting: Allow some time to pass so that your financial situation and credit score is stronger.
- Use a broker: They will be able to match you with suitable lenders.
- DIP first: Don’t jump into an application without doing a DIP/AIP first.
How to avoid getting declined
There’s no sure-fire way of doing this, but there are a number of things that can strengthen your position.
The first will be to ‘Get yourself mortgage ready‘. Now we have written a whole guide on this but essentially you need to take some time to go through all of your finances and make sure it’s all ‘tip top’.
Have a credit history: No we are not crazy! It’s important to have something on your credit file, otherwise the lenders have no way of assessing how you handle your regular payments. Try to avoid having a thin credit file, but don’t go mad!
Register to vote: Being on the electoral roll confirms your address and helps with the verification process.
Stay in your job: Don’t go changing your job just before applying for a mortgage, or hopping from one job to another.
Spend wisely: Keep your spending as low as possible, try not to use too much credit.
Use a broker: I was tempted to put this as the only way to avoid getting declined! A broker can help in many ways but primarily they can:
match you to a lender who is more likely to say yes.
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What happens if your mortgage offer is withdrawn?
This guide aims to provide a comprehensive understanding of why mortgage offers may be withdrawn, the various stages at which this can happen, and the proactive steps you can take to move through this challenging situation.
