When it comes to buying a home, securing a mortgage is often the biggest hurdle. While it’s not uncommon to be denied a mortgage at some point in the process, it’s important to understand the reasons why your application might be refused in order to improve your chances of it being approved now or in the future.
The 7 most common reasons for being refused a mortgage include:
Insufficient income:
In recent years, lenders have become comfortable lending multiples of as much as 4.5 or even 5.5 times income, subject to affordability. However, the largest income multiples are usually only granted to customers with a strong credit score, a high deposit, and a low debt-to-income ratio. If any of these factors are not present, a lender could well turn down your application.
Poor credit history:
Your credit history is a key factor in determining whether you’ll be approved for a mortgage. If you have a history of late payments, defaults, county court judgments (CCJs), or high levels of debt, this could concern lenders about whether you’re able to manage your finances and pay your mortgage on time. A mortgage broker may be able to help you if you have bad credit.
Insufficient deposit:
Most lenders will require a deposit of at least 5% in order to grant a mortgage. The larger your deposit as a percentage of the property value, the less risk there is of the lender getting their money back if you default on your mortgage. A larger deposit usually results in better interest rates, more flexible criteria and improved chances of being approved with a lower credit score.
High debt-to-income ratio:
Lenders will typically want to see that your monthly expenditure and credit commitments (including the proposed mortgage payment) do not exceed a certain percentage of your income. If your debt-to-income ratio is too high, you may struggle to pay your monthly mortgage payments on time.
Limited employment history:
Lenders may be reluctant to grant a mortgage to someone with limited employment history as they usually want to see that you have a stable and sustainable income, as this is an indicator of your ability to pay back the mortgage.
Self-employment:
While it may not seem fair, employment status has been a long-standing and persistent disadvantage to self-employed people seeking a mortgage. Many lenders associate self-employment with volatile income and therefore greater risk of default. Some lenders may be hesitant to approve a mortgage to self-employed individuals, or may require a larger deposit.
Age:
Most lenders have age restrictions for mortgage applicants. If you are too young or too old, your application could be refused. Lenders want to ensure that you will be able to make the mortgage payments for the full term of the mortgage, taking into account your income at all times throughout the mortgage term.
There are many other reasons why mortgages are refused, often having to do less with the applicant than with the property itself. Lenders will assess the structural integrity of the building to ensure the property is habitable. Factors such as severe roof damage or subsidence may result in a rejected application. Some lenders will also have standing policies that prohibit lending on certain types of property – properties attached to commercial premises are often subject to such rules.
If you are refused a mortgage, it can be a frustrating and disappointing experience. However, it is important to remember that being refused a mortgage does not necessarily mean that you will never be able to buy a home. There are steps that you can take to improve your chances of being approved for a mortgage in the future. This might include improving your credit score, saving up for a larger deposit, or reducing your debt-to-income ratio.
We recommend speaking to a mortgage adviser who will be able to identify the lenders that are more likely to accept your application based on your current circumstances and guide you through the application process.
You can find the UK’s best-rated advisers in our mortgage adviser directory.
