What Do Lenders Look For When Checking Your Eligibility For A Mortgage
Before a lender will lend you money to buy a home, they want to make sure you can repay it. So they want to see if youre responsible when it comes to paying debts, how much you can afford and whether you fit their other criteria, such as age and UK residency.
Lenders will look at:
Your income they usually want to see your most recentP60and three to six months of recent payslips. Some lenders may also look at government benefits and child maintenance.
If youre self-employed, you wont be able to provide payslips and your income may fluctuate more than someone who is employed. You might be asked to produce accounts and the checks may be more rigorous.
Your expenditure you may be asked about outstanding loans, credit cards, household bills and insurance policies. Lenders will also want to know about other regular expenses, like child or spousal maintenance, school fees, childcare and travel to work costs. They may also ask you to estimate other living costs, like how much you spend on clothes and going out. You may need to provide a few months of bank statements to back up your figures.
Future scenarios lenders will stress test how likely you are to be able to pay if circumstances change if interest rates rise, for example, or if you’re made redundant or have a baby. For example, a lender may stress their mortgage rate by 3% to see if its still affordable.
If youre taking out a joint mortgage, lenders will look at the finances of everyone involved.
What Credit Rating Do You Need To Buy A House
Youve spent years saving up your deposit for a new home. Youve waited for the right moment. Now its here. The only thing left is to secure your mortgage. We can help show you how.
If youre thinking of buying a home, youll need a credit rating thats good enough to secure a mortgage. Your credit rating is a snapshot of how youve managed money in the past including past borrowing, repayments, how much of your available credit you routinely use, how many payments youve missed and several other factors to create a score. The higher the score, the better your chance of being offered a better deal on your mortgage.
There are three major credit reference agencies each with a slightly different scoring system. So its a good idea to check your credit rating with all three to find out how you rate. That way, youll know whether youre likely to get a mortgage.
What Are The Chances Of Getting A Mortgage With Bad Credit
After looking over our figures, we average around 2-3 declined applications per year. Of those we managed to place the vast majority with a second lender and have a mortgage offered.
These are probably not the most accurate figures but are a pretty good indication. We average an offer on 95% of the applications we make first time. We also manage to get the bulk of those declined applications through on a second attempt with an alternative lender. I think where we take on your application, there is a good 98-99% chance that you will end up with a mortgage by the end of it.
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Work On Improving Your Credit Score
Most options for building up your credit score involve demonstrating a consistent track record of responsible spending. You could apply for a credit builder card, designed for people unlikely to qualify for traditional credit cards. You should also work on paying down any outstanding debts and keeping your overall credit usage low.
Save For Down Payment
A down payment is essential to buying a home. Its the first thing youll need in order to close on any property. In some cases, it may be needed before other costs are paid for and can affect how much of your monthly income goes towards housing expenses such as mortgage payments or rent.
You might not have enough saved up yet, so start saving whatever you can. The more money that comes from savings instead of loans , the better off you will be when it comes time to buy a house because lenders view this favorably. You dont want them thinking that theyre lending their own money into something risky. Instead, make sure they see you putting yourself at risk by contributing your own savings.
A higher down payment will also increase your credibility. Your lenders will think you are more serious about the commitment of home ownership and wont delay in paying back your mortgage.
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Can I Get Equity Release As An Older Borrower
Equity release is designed for older borrowers. Eligibility for a lifetime mortgage starts at age 55 and, for a home reversion plan, it usually starts at age 60-65.
- Lifetime mortgages you take out a mortgage on your main residence in return for a cash lump sum or smaller payouts, but continue to own your home. You can either make repayments or allow the interest to roll up. The loan is paid off when you die or go into long-term care and the property is sold.
- A home reversion plan you sell all or part of your home in exchange for a single payment, or regular cash payments. You can continue to live in your home until you die or move into long-term care.
These types of mortgages can be a way of freeing up equity in your home to get a tax-free lump sum. This might be useful in supporting your retirement, but releasing equity may affect your tax position and what your estate is worth when you die. Also, having more cash might impact your eligibility for means-tested state benefits.
Maximise Your Credit History
The better your credit history, the more favourably a lender will view your application.
There are three main credit agencies: Equifax, Experian, and Transunion . You can get your statutory credit report for free from any of them. Websites such as Credit Karma and ClearScore also offer this information.
Check your credit report carefully. Occasionally, the records include mistakes which could pull down your score and damage your ability to get credit, including a mortgage. If there are any errors, contact the credit agency to get them corrected.
If your credit history is not very strong, it may take some time to build it up. Any past incidents where you missed bill payments or had problems with debt could be a significant black mark on your record.
To ensure you never miss a payment, consider setting up direct debits for regular bills. Also look at your overall credit use – it’s often better to close down credit cards or accounts you no longer need.
If you have never taken out credit, you may not have a credit history at all. Lenders may be reluctant to offer you a mortgage in this case and you may need to spend time building up a positive record.
One option is to take out a credit card and spend small amounts on it, repaying it in full every month.
- Find out more:
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Dont Miss Any Payments
This one is pretty serious, because you want to show you have a really good record of paying your bills.
If you miss a payment during the loan application process particularly a mortgage payment and the lender re-checks your credit report, it could result in a much lower credit score and could derail the loan application, said Anastos.
Remember, your credit score can keep you for getting a mortgage or affect your mortgage rate .
Spring Clean Your Expenses
If you want to be approved for a loan, Ms Mitchell says you need to rein in your spending.
Most lenders will want to see three months worth of living expenses, so its a good idea to critically assess your expenses six months prior to applying for a home loan and rectify any spending habits you feel are atypical, or could hinder your chances of being approved for a loan.
Yep, it turns out all those coffee and Afterpay purchases could be seriously hurting your chances of being approved for a loan, so work on cutting down on any unnecessary spending.
Catch public transport instead of an Uber, start shopping at Aldi and curb the mindless online shopping.
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Be Aware Of Your Credit Score
The most common mistake borrowers make before applying for a home loan is not checking their credit score. Now, the problem is that lending companies are most likely to check your credit history during the process of a loan application. Needless to say, having a low credit score or having credit fraud history can result in the loan application being denied immediately.
That is why you need to be mindful of both your credit score and credit history. Better yet, you need to build a good credit history by paying your bills and debts on time. Nevertheless, you can also fix your credit score before you apply for a loan. Check your credit report regularly and fix any errors and discrepancies. This way, youre likely to maintain a good credit score.
Make A Large Down Payment
Something as simple as a large down payment tells a lender that you know how to save well. Increase your chances of receiving the mortgage you want by putting down a substantial down payment that lowers your
For the same property, if you put down $40,000, your loan-to-value ratio would drop to 60%. As a result, the loan-to-value ratio would drop to 60%, making it simpler to qualify for the smaller loan. Greater down payments and lower loan-to-value ratios not only increase your chances of receiving a mortgage but also lower interest rates and fewer monthly payments over the life of the loan.
Remember that a 20 percent or higher down payment means you wont have to pay mortgage insurance, which can save you money.
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What To Do If A Lender Refuses Your Mortgage Application
A lender could refuse you for a mortgage even if youve been preapproved.
Before a lender approves your loan, theyll verify that the property you want meets certain standards. These standards will vary from lender to lender.
Each lender sets their own lending guidelines and policies. A lender may refuse to grant you a mortgage if you have a poor credit history. There may be other reasons. If you dont get a mortgage, ask your lender about other options available to you.
Other options may include:
- approving you for a lower mortgage amount
- charging you a higher interest rate on the mortgage
- requiring that you provide a larger down payment
- requiring that someone co-sign with you on the mortgage
Trying To Borrow Too Much Money
Its important to do the maths and be realistic about how much money you can afford to borrow.
Typically, mortgage lenders will only lend a maximum of four-and-a-half times the combined annual income of you and anyone else youre buying with. Asking for a loan above this threshold will likely result in your application be rejected and you may well find that youre offered less than the maximum.
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What Type Of Mortgages Are Best For Over 50s
Finding the best mortgage deal depends on how much youre looking to borrow and for how long, but if youre over 50 you could choose from all types of mortgage, including:
- Fixed rate this type of mortgage has a fixed interest rate for an agreed period, varying from one to 10 years. Your monthly repayment wont change during this time but will revert to your lenders standard variable rate once the fixed rate ends, unless you remortgage to a new deal.
- Variable the interest rate you pay each month can go up or down depending on the lender’s mortgage rate.
- Tracker with this type of mortgage, the interest rateis tied to the Bank of England base rate. Most tracker mortgages have terms of two or five years.
- Discount this offers a discount on the lenders SVR, normally for a set term of one to five years. Monthly repayments could fall as well as rise.
Some lenders have specialist mortgages aimed at older borrowers, which can make it easier for some people to get a home loan later in life.
What Is The Age Limit For Getting A Mortgage
Each lender sets its own age limit for mortgage applicants. Typically, this is either:
- your age when you take out a new mortgage, with the limit ranging from around 70 to 85
- your age when the mortgage term ends, with the limit ranging from about 75 to 95
Regardless of how old you are when you take out a mortgage, youll need to be sure you can afford the repayments throughout the full term, including on any outstanding balance after you retire.
If youre having issues with age limits or repayments, you could consider a lifetime mortgage, which is a type of equity release. However, youll need to bear in mind that releasing equity in your property can affect your eligibility for some state benefits and also impacts on what your estate is worth when you die.
Some lenders offer retirement interest-only mortgages, which allow you to pay off the interest only, meaning your repayments should be lower. The loan amount is usually paid off when the last borrower moves into long-term care or dies.
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Check Your Existing Credit Score
There is a common misconception that checking your credit report can be detrimental to your overall score.1 This is not true.
There are two types of checks that can be made on your credit score. Checking your own credit report is a soft enquiry and wont affect your score. However, giving a lender permission to check your credit report is classed as a hard enquiry and this does affect your score.
The Australian Securities and Investments Commission suggest an annual check, something you are entitled to do for free2, to:
- Make sure that your name or date of birth are correct,
- See if your address needs updating,
- Check if any debt has been listed twice or whether the amounts are correct,
- Whether you have been recorded as missing any repayments,
- Whether someone might have stolen your identity to get credit.
If anything is incorrect now is the time to get things fixed. You can do this for free by ordering a report from a credit reporting bureau, such as Equifax.
To learn how credit score is calculated and what can cause a default to occur .
Avoid Taking On New Debt
A mortgage loan is a major financial commitment, both for you and the lender, so its natural for lenders to be sensitive to other debts that could make it difficult for you to keep up with your monthly payments. As you get your credit mortgage-ready, apply for a loan, and go through the home buying or refinancing process, its critical to avoid applying for other credit accounts.
If you expect to need a loan or credit card, complete that process six or more months before you submit your mortgage application.
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Your Credit Score Isn’t Good
It’s not just your income that lenders use to predict the likelihood you’ll pay your loan balance — they’ll also look at your past track record of paying your bills. The easiest way for them to assess whether you’ve been responsible with your debt is to look at your credit score and report.
If your credit score is too low and your report shows a track record of defaults, missed payments, or a recent bankruptcy or foreclosure, lenders are going to be concerned that you won’t pay them on time. As a result, you’ll probably get denied for a loan.
While some government-backed mortgages, such as FHA loans, allow you to borrow with a credit score as low as 500 , you will have a hard time getting a loan from a conventional lender without a score of at least 620. And if your score isn’t in the mid to high 700s or above, you’re going to pay more in interest if you are approved for a home loan.
Avoid Big Purchases Until After You Close
If you are hovering near the loan limit, leave your credit cards alone, said Jensen. One large purchase say a new TV for your new house, or buying/leasing a car right before closing can completely derail your loan application. Wait until the ink is dry on all the papers before you buy a new toy.
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