1. Bad credit scores
It is no surprise that having an impaired credit history will most likely have an impact on your mortgage application.
A bad credit score essentially means that you are a high-risk borrower. You may have a history of late payments, but there are also other factors that could have contributed to a bad rating. For example, you may have made bad decisions in choosing which credit cards are right for you, declared bankruptcy, or paid only the minimum amount on your credit card each month.
In general, the better (ie higher) your score, the more eligible you are for lower interest rates.
If your credit score is low, you can try to improve it by, for example:
ensuring all of your details (especially your address history) provided (eg to your bank) are correct
making sure to pay all bills on time
clearing any outstanding debt
checking for any fraudulent activity on your accounts
ensuring your credit isn’t linked to someone else (eg a family member) who has a bad credit rating
2. Having no credit history
When you have no credit history, you have nothing on your credit report. This means that banks or mortgage lenders can’t really find patterns in your behaviour because you haven’t borrowed anything before nor engaged in other activities that contribute to your credit score.
Your mortgage lender needs to feel confident that you will be able to make your mortgage repayments. This is why it’s highly advised that you build up a good credit report before putting forward your mortgage application.
To build your credit history, consider:
registering to vote at your home address, as this acts as a record of your name and address
opening a bank account and managing it well (eg not going into unarranged overdrafts)
applying for and using a credit card to build credit, where possible, making sure to pay the credit card debt on time and in full (eg by paying by direct debit)
taking out small-form credit (eg a mobile phone contract or store card), which is easier to pay off and shows your financial responsibility
ensuring your bills (eg phone and utility bills) are paid in full and on time
3. Too many credit applications
Mortgage lenders may reject a mortgage application if you have too many credit applications. Whenever you apply for credit, this is recorded on your credit report and may even lower your credit score slightly. If you repeatedly apply for credit (especially in a shorter time period), you will look to mortgage lenders as if you are having money troubles.
In order to improve your mortgage application, it is a good idea to stop applying for any other forms of credit in the 12 months before applying for a mortgage.
4. Too much debt
Many mortgage lenders will reject a mortgage application if you have existing debt that is higher than your mortgage application. If possible, before applying for a mortgage, you should try to clear any (large) outstanding debts that may significantly impact your application. If you’re struggling to pay your debts, consider speaking to a debt adviser, for example, at National Debtline.
5. Not earning enough
Mortgage lenders may reject your mortgage application if your income is too low, especially if your income wouldn’t cover your mortgage repayments. Generally speaking, you can borrow around 4 to 4.5 times your annual income.
If you’re worried about your income being too low for your desired mortgage, you should speak to a mortgage advisor before applying for a mortgage.
You could also consider buying a home under a shared-ownership scheme instead of using a full mortgage.
6. A high debt-to-income ratio
Your debt-to-income (DTI) ratio is the proportion of your monthly income that is used to pay your existing debts (eg credit card debts or car financing obligations). For example, if your gross monthly income (ie your total income before tax and any other deductions) is £2,500 and your regular monthly debt payments are £750, your DTI is 30% (ie 750/2,500 = 0.3).
Generally speaking, the lower your DTI is, the more likely your mortgage application is to be successful. This is because anyone with a low DTI is considered to be a ‘low-risk’ borrower.
7. Being self-employed
Many mortgage lenders do have packages designed specifically for self-employed individuals.
The problem lies in how soon you apply for your mortgage. Most lenders require at least 2 or 3 years of business accounts, and some self-employed people cannot provide this. Moreover, the more accounts you can show, the better. This is because lenders will base their calculations on your average profit over the past few years.
8. The presence of pesky plants
More specifically, Japanese knotweed. This is notoriously known as the plant that kills mortgages. Its growth is so aggressive that mortgage lenders have been reluctant to lend on a property with the plant.
The shrub can open cracks in foundations and brick walls and may damage drainage works. Even after the situation has been treated (which can take up to 2 years), there is still a risk that Japanese knotweed will later come back and grow like before if you awaken the original root. Meaning it will be difficult to build home extensions or even a conservatory.
9. Changing your name
Changing your name won’t necessarily affect your application. However, if you are not on the electoral roll because you haven’t registered yourself with your new name (eg if you’ve changed it after getting married), chances are your mortgage application might get rejected. Therefore, it’s a good idea to make sure you inform all relevant parties (including your bank and the electoral roll) about any name changes you undergo.