Let’s not beat around the bush. Applying for a mortgage is stressful. You’ve saved up, you’ve found the home of your dreams, and now it all comes down to sorting out the mortgage. You provide all the information required to the lender, your mortgage broker is confident and then comes the response. Application rejected.
So, what went wrong? Well, first you need to think like a lender. When it comes to approving applications, all decisions are made on a risk basis. The primary question the lender will be asking themselves when they review your application is ‘do we think we will get our money back?’
To answer that question, lenders will use a number of criteria to score how risky an investment you appear. The criteria will vary from one lender to the next, with each lender keeping their exact scoring criteria securely locked away in the vaults. Some lenders will use a fairly automated style of underwriting (think “computer says no”), whilst others will apply a more manual approach.
Insight into lenders
Luckily, we have the benefit of regularly working with many of the lenders and so are able to offer you an insight into the main criteria that is used. Some will be fairly well known. Others less so.
1. Credit score
Your credit score incorporates a number of factors. It provides an instant snapshot as to how you manage your finances along with things such as whether you are on the electoral roll, your address history, etc. It considers both your current position but also your historic financial management.
The score will be calculated using information such as what loans and credit cards you have, where you’ve made and missed payments, what county court judgements (CCJs) have been lodged against you and also if you’ve ever been declared bankrupt.
But don’t be scared if you have loans and credit cards on your credit record. Many often think these are bad for your credit score and that it’s better to have no debts. However, the opposite is often true. Whilst you don’t want to be carrying lots of debt, your credit score improves as you make debt repayments. The reason being that it demonstrates a track record of being able to have debts and manage their repayments. As strange as it may sound, having no debts can actually be seen as a negative.
Would you put your money on a racehorse who had successfully competed in many races or one who had never raced before? If someone has never had any debts before, how can you predict whether they would be able to manage being in debt?
2. Credit searches
This is linked to your credit score, but something people are often unaware of. There are two types of credit search – a soft search (which is where for example you have looked at your score) and hard searches (where a finance provider has reviewed your credit file as part of an application for finance/credit).
Your credit score will highlight how many ‘hard’ credit searches have been completed against your name within a recent period of time (usually the last 3, 6 or 12 months). The more searches within that time frame, the higher risk you appear. The reason being that lenders assume you are either desperate for finance or that potentially other providers are rejecting you.
It’s important to note that every time you apply for a mortgage, a loan, a credit card, or any other type of finance it will show up on your credit file that a search has been conducted. This can even include things such as a new mobile phone contract. To help improve your credit score, keep your hard credit searches as low as possible.
3. Loan to value (LTV)
Here the lender wants to understand how much risk they’re exposing themselves to as a result of potential future changes to the price of the property. The lower your deposit, the greater the LTV and thus the greater risk to the lender.
From a lender’s perspective, their concern is that if property prices fall, the value of the property could be less than the amount they have loaned you. Should they ever be required to repossess the property (i.e. if you fail to make your mortgage repayments), the amount they would recover from selling the property wouldn’t cover their loan and so they would lose money.
Therefore, the larger your deposit and the lower the LTV, the more chance you have of your application being accepted, as you are reducing the risk in terms of falling house prices.
This is the starting point when it comes to seeing how much you can borrow. People will often talk about income multiples (i.e. how many times your salary will they lend) when it comes to borrowing.
When considering lenders, you may want to look at how they view additional income such as overtime and bonuses.
5. Disposable income
Your disposable income is the amount you have available each month after the deduction of all outgoings. Going back to the question ‘do we think we will get our money back?’ the greater your disposable income, the lower the risk to the lender.
If for example the mortgage repayment is £500 per month, a disposable income of £1,000 is perceived lower risk than one of £600.
6. Pension contributions
Some lenders will look at pension contributions when considering your disposable income. The reason being that in most cases pension contributions are voluntary. If your finances were tight, you could potentially choose to stop making pension contributions, giving you a greater disposable income.
When looking at how much you can borrow, usually having more than one applicant means you can borrow more. Obviously if the second applicant has lots of credit, low disposable income, and/or a bad credit score this may not be the case.
Interestingly, if the second applicant doesn’t have an income (i.e. they are a home maker for example), you are often better still adding them to the application. This ensures they are treated as an applicant rather than a dependent (see next point).
The likes of children and others who are reliant on the income of the applicant(s) will be defined as dependents. From a lender’s perspective, dependents are viewed as an expense, since they tend to reduce rather than add to disposable income.
Referring to the example in point 7 (applicants), if the second person isn’t added to the application, they will be treated as a dependent, thus increasing the perceived reliance on the applicant’s income.
9. Employment history
With employment history lenders are trying to paint a picture as to how stable your lifestyle and income are. Someone who has had six jobs in three years looks a lot higher risk compared to someone who has been with the same employer for that same period. The reason being that the second person appears more ‘steady and predictable’. In addition, the person who has stayed with the same employer longer will likely have better benefits such as sick pay, redundancy, etc. Again, this reduces the risk to the lender.
10. Address history
Much like employment history, the more you have moved around, the less stable/predictable you will be considered by lenders. If you’ve lived at your current address for a longer period of time (i.e. three years or more), it will make your application appear lower risk.
It’s important to note that lenders will also reference details such as your address history against the details held on your credit file/record. Any discrepancies will go against you.
11. Bank statements
Much like employment and address history, lenders will consider how long you have been with your current bank. No surprises that the longer the better.
They will also be looking to compare your income and outgoings against your application form, to make sure all matches. Usually the lender will ask to see the last 6 month’s worth of bank statements. Within this they will also be looking to see if you go overdrawn and where you tend to spend your money. For example, they may deem you higher risk if you regularly have payments going to bookmakers. On the flip side, regular payments to savings account will be deemed a positive.
12. Relationship with lender
The final area lenders will look at is whether you already have a relationship with them. For example, do you already bank with the mortgage lender? If you already have a relationship with the lender, this will mean they have first-hand experience of dealing with you as a client. Assuming you have a good relationship, it may help your application as they will want to embed you further into the company. In addition, as they hold your details, it makes it straightforward to set up your mortgage account.
We hope you found this guide useful. If you would like more information or would like to speak to someone from Furnley House, please contact us on 0116 269 6311 or at email@example.com.
We’d love to hear from you.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Furnley House Limited is authorised and regulated by the Financial Conduct Authority (ref. 624579). There will be a fee for the mortgage advice. The precise amount will depend upon your circumstances but we estimate that it will be £295 if you are re-mortgaging and £395 if you are buying a home.