Deciding to buy a property is a major life event. Many people reach this decision at some point in their lives. It is not a decision undertaken lightly either. By the time someone arrives at the point of applying for a home loan, chances are they have gone through the pros and cons of buying property. They may also have assessed their finances to see if it is viable to apply for such a loan.
Imagine, then, the disappointment that individual would experience if their application was declined. For some, it may simply be a bump in the road that leads them to their first experience of home ownership. For others, it may put them off reapplying at another date.
Here, we look at why a home loan could be declined. By exploring the available information, it may make it easier for you to avoid this scenario when you decide to apply to a lender for assistance in purchasing a property.
Are mortgages harder to get now?
The short answer is yes. Stringent rules and regulations were brought in following the recession of 2008 to ensure the market would not experience the same crash again. People were borrowing large amounts of money to help them buy expensive properties, yet they had little means to pay those loans back. In many cases, people went into arrears when interest rates rose, losing their properties as a result.
The Mortgage Market Review was developed to ensure this could never happen again. Thus, prospective borrowers must now support their loan application with evidence of earnings. Self-certification mortgages, where the applicant could tell the lender how much they earned without proving it, have been banned in the UK. Similarly, the evidence people give to support their earnings is now more rigorously reviewed.
So, if you are rejected for a loan, it is worth remembering there will likely be good reasons for it. It also makes it more important to go through your financial situation prior to making an application. This could increase your chances of getting over all the required hurdles.
Can mortgage lender pull out?
This is rare, but it can happen. It is perhaps most likely to occur if the lender decides to go over your finances again. Never be tempted to lie, or to simply fudge the truth, over any aspect of your financial status or situation. While such a fudge could make the difference between getting an offer or failing in this endeavour, your offer will be withdrawn if such a falsification is discovered. It could end up costing you some money, as you will need to withdraw from the sale. That means you could lose out on any costs you’ve already paid for.
Be aware also that home loan offers normally expire after a few months. When a lender provides an offer, check how long it is valid for. Make sure you buy your property within that period. If you do not, your offer will likely expire… meaning you would need to go back to the beginning and start again.
How mortgage affordability is calculated
There are three elements that are considered when assessing affordability:
Your income (including that of your partner if you are applying jointly)
Any repayments made on current loans of any kind
There are many affordability calculators online that you can use to work out how much you can afford to borrow. These calculators are free to use and can usually be found on lenders’ websites.
Today, lenders will also consider potential future changes that could occur. The most obvious of these is an increase in interest rates. However, other scenarios might also be considered. For instance, if you are intending to start a family, that could mean one or both partners may take unpaid time off work.
In the past, before the MMR came into being, lenders worked out how much they would loan you based on the loan-to-income ratio. This is a multiple applied to your income to work out the ceiling amount you might receive to help you buy a property.
However, things are now more complex. The ratio tells a lender nothing about your current level of outgoings. Two individual applicants may both be on an income of £30,000 per year, for instance. However, one may have outgoings that are double that of the other. Clearly, this would affect the amount they may be offered for a home purchase.
Are mortgages cheaper than rent?
The answer to this question can change, but it is generally cheaper to buy a property rather than renting one. A lot will depend on where the property is, its size, and the typical rental payments in that area. However, most people find they can save money by purchasing a home of their own. The trick is to save enough for a deposit while still meeting the higher monthly rental payments.
Can mortgage lenders check with HMRC?
Yes. This may occur via the Mortgage Verification Scheme. This scheme was designed to allow lenders to apply to HMRC for evidence of the applicant’s income. However, it will only be used when the lender can’t get adequate evidence to back up the figures provided by the applicant. If you are honest on your application and provide ample evidence to support your figures, the lender will have no need to resort to the scheme.
Even in circumstances where you cannot provide proper information, but you are being truthful, you should have nothing to worry about. If your figures tally with those given by HMRC, the lender can proceed accordingly.
However, you should be aware that failing to be honest about your income while applying for a home loan is fraudulent. If the lender suspects you may have lied, you are almost certain to be found out via this route.
Why do mortgages fall through?
Applying for a loan to help you buy a property is an exciting, if draining, time. There is paperwork, figures, facts, and more paperwork to cope with. The last thing you want is for that loan to fall through at any stage.
We’ve covered some of the most important points above. One survey found nearly 10% of property deals fall through because the buyer has problems getting an offer from a lender. It is vital to secure a firm offer prior to putting in an offer on any property. You risk losing out – and incurring the annoyance of the seller – if you don’t.
Other mortgages fall through because applicants are less than honest when giving figures to the lender. If you are discovered to have been dishonest at any stage, you can expect your lender to withdraw their offer immediately. The same applies if your earnings don’t tally with those you gave to HMRC, as detailed above.
Finally, an expired offer can also lead to the mortgage falling through. If the applicant didn’t realise the offer was date-stamped, they may make an offer on a property without realising they no longer have a solid offer to go on.