Why a Quarter of All Home Buyers Are Refused a Mortgage and What to do if You’re One of Them!
Applying for a mortgage is an exciting and potentially nerve-wrecking prospect. It might mean you are considering buying your first property, buying your next property or refinancing your current home. It is an important milestone in anyone’s life and also the biggest commitment you will ever have. This means that the bank or building society thinking of lending the cash to you, needs to be sure you are a good risk.
Just as many home loans are approved each day, so many others are rejected. This will naturally come as a shock to most people, especially if they had never previously considered the thought that they may not be accepted for the loan they applied for.
Did you know that one of the most common reasons for being declined a mortgage is not meeting the ‘Lender’s Profile’? **
Reasons why mortgage applications are declined
This situation can occur for several reasons. Some are simpler to resolve than others.
Debt is a major red flag when considering someone for a mortgage application. A lender will look at various factors when assessing your suitability. Your earnings, your outgoings and your debts will all feature high on that list. The more debt you hold, the higher your outgoings will be to help pay off those debts. That leaves less wiggle room for meeting a mortgage payment. Lenders all have different ‘debt to income’ ratio’s which they will use to assess your ability to service a mortgage.
An example of this ‘debt to income’ ratio, may be that the lender will simply decline you if your debt level is 50% of your income level (excluding any mortgage debt). A different lender may be more lenient and have a ‘debt to income’ ratio of one-to-one and might consider you if you had £50,000 income and £50,000 of debt.
man carrying debt
We mentioned earnings there too and this could also be a potential barrier to being accepted for your home advance. Lenders will evaluate what they can lend you based on earnings and outgoings. You may find you can borrow far less than you imagined. Some applicants, especially when they are self-employed may think they earn more than what they do based on their tax returns or accounts. Your income must be declared correctly to the lender and if your income is proved to be lower than what you have advised, then your mortgage could be declined or the amount they are willing to lend could be significantly reduced.
Are you registered on the electoral roll? If not, you may not be accepted for the loan. If you are unsure whether you are registered, it is wise to check and correct any details prior to making your application. Your local electoral registration office can assist you. The official website for voting makes it easy for you to find your local office and you can find this at https://www.yourvotematters.co.uk/register-to-vote/find-your-local-authority.
Another common reason for rejection is being let down by your credit report. Do you have a poor credit history? Does it show you’ve missed payments? Does it indicate you have made multiple applications for credit elsewhere already? If one or more issues like this appear, your application is likely to be declined. A top tip is to get hold of your credit report prior to making your application and to pass this to your mortgage broker so they can see what the lender will see. This will highlight any potential issues which can then be resolve before applying for your loan. You might even spot an error that could jeopardise your application. If so, make sure you contact the credit agency you requested your score and history from and ask them to correct it.
Wealthy – But not cash / income rich
man with empty wallet
Some applicants may have ample wealth which is tied up in assets such as property, for example. However, they may be ‘cash poor’ and have very little income to qualify for a mortgage deal. This type of person may be declined by the common and familiar high street lenders, due to the way they assess income and it may well be that one has to find a private bank to assess their overall assets and liabilities in order to provide a mortgage.
The ‘Bigger Picture’ or Story
If the story being told to the lender doesn’t stack up or smells a bit fishy, this could be another reason for a decline. For example, you may have just been awarded a pay-rise whilst working for a family business. Lenders will be sceptical of this and may want you to have a 3 month or 6 month history of this pay rise being awarded, rather than accepting it at face value on day 1.
You could be declined for a mortgage based on information held at credit agencies such as CIFAS or ‘Hunters’. These are credit agencies who might store negative information about you which lenders have access to in their normal day to day underwriting process. The information held at these agencies would not be divulged to your mortgage broker so you would be none the wiser as to why your mortgage application had been declined in this instance.
Your Track Record
If you have a track record of refinancing your mortgage every 2 or 3 years and on each occasion request additional borrowing (known as ‘capital raising’) to repay debt that you have accrued, lenders may disapprove of this and may consider that you are not living within your means and reject your mortgage application.
computer says no note on keyboard
Another common reason for being declined is lender ‘Administrative’ errors, where the lender has entered information about you which is incorrect by mistake! This does happen and probably more frequently than we would like to think. This is one of the main advantages of using a respected mortgage broker because it is their job to input your details in the correct format and if they were to make a mistake, they can find out why and put it right. When dealing with a lender directly you may not get this luxury and you may fall victim to the “Computer Says No” scenario.
Why would your mortgage be refused? Is there anything you can do about it?
The first thing to do is not to panic. Some issues can be resolved quite easily. For example, getting registered on the electoral roll is quite easy to achieve if this is what has tripped you up. Other scenarios might require you to take different steps to find a resolution. Those extra steps may mean it will take longer for you to reach the result you want (e.g. If you were rejected on the grounds of having too much debt and you came up with a plan for reducing that debt). You can then reapply when you are in a better financial position in a few months’ time.
If you are refused by one mortgage lender, it doesn’t mean you will be refused by all lenders and this is where the advantages of a broker can be much more beneficial than trying to source a mortgage for yourself. A respected mortgage broker will be able to assess your credit file, income and expenditure, then match your personal circumstances with a lender and their criteria.
Can you benefit from learning why mortgage applications are rejected?
If you are starting to think about buying your own property with the help of a home loan, this is the best time to consider potential hurdles that you may face when submitting your application. It’s much better than applying, only to find out afterwards your situation would likely result in a rejection.
Lots of people want to know why mortgages are declined. However, most people only feel drawn to discover more once they have experienced this situation themselves. Conversely, if you find out more before you begin the application process, you can discover if there are any potential weaknesses in your circumstances. This knowledge will then assist you in making changes which could result in your application being seen in a more favourable light.
For example, do you hold a lot of debt on credit cards or store cards? If so, the payments to service these debts will eat into your disposable income each month. Your income and expenditure will be considered by the bank or building society looking at whether you are a good candidate for a loan. They need to be sure you can meet your monthly payments on your loan – not just now, but also if interest rates were to go up in future. The stricter requirements in place now require such a stress test to be applied.
While you cannot go through all the steps a lender would assess before giving you a decision on your loan application, you can take a dispassionate look at your own finances. Do the sums. Crunch the numbers. Make sure you reduce your outgoings as much as you can. The more disposable cash you have each month and the less debt you hold, the better your application chances could be.
Can a mortgage offer be withdrawn?
It is extremely rare that this would happen, but there have been cases where lenders have changed their minds and withdrawn an offer after agreeing to it. Some people have even been sent confirmation in writing of the offer, only to then receive a letter or contact cancelling that offer.
Reasons why a mortgage offer can be withdrawn may include:
Your income or expenditure has changed since the application
Your personal situation has changed since the application
New information about you has been provided to the lender which has had a negative impact on your application
The Mortgage Marker Review ‘MMR’ framework which was introduced back in 2016, included rules which should prevent lenders from going back on a funding agreement at a late stage in the process. There have been reports of would-be buyers having their funding withdrawn just as they are looking forward to stepping into their new home. Reports indicate some have ended up out of pocket on legal and other fees because of this.
Whilst it is highly unlikely that you would find yourself in a similar situation, you do have the option to complain to The Financial Ombudsman if the lender does not give you a justified response to your complaint.
Another point worth noting, is that a Mortgage Offer made in writing may have a date whereby it would expire. For example, let’s assume a lender has agreed to offer you £200,000 as a home loan. This may be valid for a few months – so if you cannot complete your purchase in this time, you may discover that the offer has been withdrawn by the time you are ready to complete the purchase of a property. Always make sure you enquire about any time limits on an offer. This means you will know where you stand.
Can a mortgage offer be withdrawn after exchange?
Unfortunately, yes, this can occur. Most people would assume that the exchange of contracts is the final step before moving into a new home and most of the time it is. However, there are a few situations where the lender may decide to withdraw their offer, even at this late stage in the process.
For example, if you suffer a sudden significant drop in your earnings, the lender will reconsider the offer made to you. The change in income would make it less likely you could meet your repayments. Some cases have come to light that allegedly involved mistakes made by the lender, rather than the applicant. While it would be rare to find yourself in this situation, it is recommended that you that you appeal your case with the lender and if required refer your case to The Financial Ombudsman.
Of course, you must always be 100% honest when making your application. Not disclosing the truth could cost you dearly if your creativity with the facts is discovered. Anything like this would usually result in your offer being withdrawn with immediate effect.