10 mortgage pitfalls and how to avoid them
Mon 17 Mar 2014
Mortgage lending may be at its highest level since the financial crisis but taking out a home loan remains difficult for many. Banks and building societies are still unwilling to lend to all but the safest borrowers, while a new wave of regulations at the end of April means customers will be placed under more scrutiny than ever. Borrowers need to work hard to put their finances in order and give themselves the best chance of securing a mortgage. Here are 10 things that could put the brakes on your mortgage hopes, and how to try and fix them.
1 RECENTLY BECOMING SELF-EMPLOYED
Self-certified loans previously offered a way for the self-employed to buy a home, but abuse of these mortgages – dubbed "liar loans" because they required no proof of income – brought about their demise during the financial crisis. The Financial Conduct Authority will officially ban self-cert mortgages in April when the mortgage market review rules come into place, but this has left some self-employed borrowers struggling to access finance.
"If you have been self-employed for less than 18 months you may have no option but to wait a little longer until your business is more established before applying for a mortgage," says Mark Harris of mortgage broker SPF Private Clients. If you do have a few years behind you, you might find that you are not able to borrow as much as you hoped, he warns. "Each lender has a different approach to how they will calculate borrowings – some may take an average of your income over the past three years rather than the best year."
Harris says Investec, Kensington, Leeds, and Saffron building societies are the most sympathetic to self-employed applicants.
2 MAJOR LIFESTYLE CHANGES SUCH AS HAVING A CHILD
Lenders want to see a settled financial picture, so any recent major changes in your circumstances could affect the amount you're able to borrow. Having a child or switching jobs right before an application is likely to lead to increased scrutiny and, if you are currently renting, you could face problems if you have moved home on a regular basis. Mark Dyason of brokers Edinburgh Mortgage Advice says: "A client with over three years at one address is in the best position."
3 BIG OUTSTANDING DEBTS OR AVAILABLE CREDIT
Mortgage providers are unlikely to accept people who have significant outstanding debts, so prospective borrowers should look to pay off as much as possible. If you have large unpaid debts, the amount you can borrow will be severely restricted. Even if you have no major debts, lenders will take into account how much credit you can access to see how much debt you could rack up, so close any credit cards you no longer use. "Lenders will be able to view you as a more plausible applicant if you do not have large amounts of available credit showing, even if you are not using it at the time," says Ian McGrail of First Mortgage.
4 NOT BEING REGISTERED ON THE ELECTORAL ROLL
The electoral roll is used to verify a borrower's identity quickly and if you are not registered to vote you could face additional ID checks. "If you are not on the electoral roll then the lender cannot trace your credit history," says McGrail. Call your local council, or check its website to see if you can sign up online. If you are unsure where to register, visit gov.uk/electoral-register.
5 A BAD CREDIT RATING WITH THE MAJOR AGENCIES
Credit scoring companies are ingrained in the mortgage process. Harris recommends borrowers use services such as Experian, Equifax and Call Credit to check their own records and correct any issues before applying.
6 EVIDENCE YOU'VE BEEN USING PAYDAY LOANS
Already highly controversial for their high rates of interest, a payday loan could also harm your chances of mortgage success. Welsh building society Principality has become the first lender to officially change its criteria to bar those who have taken out a short-term loan in the past 12 months, but other lenders, too, may not accept you if they find evidence of a payday loan. Dyason says banks believe regular use of payday loans suggests you are stretched or unable to manage your finances: "They give the impression of a person who cannot make it to the end of the normal month on their standard pay or someone who has no backup plan if things happen that need to be sorted."
7 AFFORDABILITY: DON'T TRY TO BORROW TOO MUCH
"It is important you can afford any mortgage you take out – not just now, but in the future," Harris says. "Interest rates may be at record lows but they will rise at some point and you need to ensure you can afford higher payments."
Be realistic about what you can afford. "It might make sense to moderate your ambitions and buy a smaller property, rather than stretch yourself and then struggle to pay the mortgage further down the line," he says.
8 RECENT DEFAULTS OR COUNTY COURT JUDGEMENTS
The sub-prime mortgage market has shrunk dramatically since the financial crisis and anyone with recent problems will find it tough to get a loan. Magellan Homeloans last summer became the first sub-prime lender to launch since the credit crunch.
Targeted at borrowers who have suffered a financially damaging one-off event, the rates are considerably higher than those available for "prime" borrowers. Other lenders, such as Precise Mortgages, will offer near-prime products for those with lesser financial issues, but high street options remain limited.
9 FOOTPRINT LEFT BY APPLYING FOR TOO MANY MORTGAGES
Each time a credit check takes place a "footprint" is left on your file. If you are rejected this will leave a record on your file and damage your credit score. "The more credit you apply for, the more it looks like you can't find it and are getting desperate – not the profile of customer a lender is looking for," explains Dyason.
"Beware of comparison sites for other products, such as changing credit cards or car insurance. I had a client who ran up over 20 credit checks via one site and was unaware that he had done so."
If you have been rejected, using a broker will be a better bet than making another direct application to a lender.
10 PAYMENTS TO GAMBLING SITES AND GOING OVERDRAWN
Regular payments to gambling websites are a big no-no. "While payday loans are still relatively new, and lenders are just getting to grips with them, we have seen lenders reject applicants for having regular items on their bank statements such as payments to William Hill," says Harris.
Excessive outgoings, or regularly going overdrawn, will also hamper your mortgage ambitions.
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