Even before you start looking at houses there are some simple things you can start doing to get yourself ready to apply for a mortgage.
Break them down one at a time to ensure a smoother path to mortgage happiness.
Check your credit report.
Your credit report lists all your credit history (for the last 6 years), and includes your past credit cards, loans, overdrafts, and mortgages. It even includes mobile phones and some utility accounts.
Lenders use your report to check your history and credit worthiness. They need to be convinced that you’ve got the financial discipline required to pay back your mortgage. Looking at your credit report(s) allows them to check if you’ve got a good repayment history.
Historically you would have to pay to get your credit report, but since the introduction of GDPR in May 2018, you can now get them all for free. There are 4 agencies in the UK, and it is worth checking all of them because different lenders use different agencies. We recommend you use www.checkmyfile.com as it covers all 4 in one.
So, what if your credit report isn’t so good?
Having a bad credit report is not the end of the world, it does not automatically mean you won’t get a mortgage, but it’s definitely got the potential to lower your chances. To give yourself the best possible chance of acceptance, make sure that you take the time to get your credit report in good shape.
Correct any errors in your credit report.
On checking your credit file, if you find that any of the information is incorrect, you have the right to do something about it. You can either have the error corrected or, at the very least, have your say.
Your first step is to check if the error is on your credit file held with all the agencies, then talking to the individual credit company where the error is. If this doesn’t work, then you can contact the Financial Ombudsman who could step in and order corrections.
Ensure you are on the electoral register.
This is very important. You might have a perfect credit score but without being on the electoral register, it’s going to make it more difficult to get a mortgage. Lenders use electoral roll data in identity checks (to ensure you are who you say you are, and live where you say you live and that you’re not laundering money).
Your credit report will say if you are on the electoral roll or not, so check this as early as possible. It usually takes around a month to be added to the register but, in late summer and early autumn it can take longer.
If you find you’re not on it, you can get added for free. If you’re not a UK or EU national then you can’t get on the electoral roll to vote, however, you can put a notice of correction on your file, stating that you have other proofs of address and ID that you can use to verify yourself.
An ex-partner’s score can affect yours
If you have a financial association with someone else (this happens if you hold joint credit accounts), but you’re no longer together and have nothing to do with them, get yourself un-linked. If you don’t then any mistakes, they make could reflect badly on you. Write to the credit agencies and ask for a notice of ‘disassociation’.
You could even find that you are linked to old flatmates if you had a joint bank account for bills, so it’s worth checking that their credit history isn’t affecting yours. Again, if it is, then do as above.
Close Inactive and historic accounts
If you are no longer using an account that shows on your file, or you forgot that you had it, it might be worth having this closed. Just leaving it could open you up to fraud, but it could also mean that your details need updating.
It is important to point out however, that if you are applying for a mortgage, longer, stable credit records are a positive. So, if you’ve got two credit cards, one that you’ve recently opened and an older one, it is probably worth keeping the older one open otherwise you could lose the credit score benefit that it gives you.
Manage your available credit.
This is about managing how much credit you have available to spend on credit cards and overdrafts. It’s the difference between your outstanding balances and your overall credit limits.
You should try to find a balance between not having too much credit outstanding, and not being too close to your credit limit. A lender needs to see that you can manage your credit effectively, and that you are not too overstretched.
If you find that you are using quite a bit of your available credit, don’t lower your limits as you will be too close to your limit. Likewise, don’t have too much credit available either as new lenders could get worried that you may suddenly become far more indebted than currently.
This whole thing is a balancing act, and every lender has a different view of how much credit you ‘should’ have. As a rule of thumb, always try to remain below 50% of your overall limit, but if you can pay off debt then you should do so.
Avoid applying for credit just before a mortgage.
If you know that you are going to be applying for a mortgage, you should avoid applying for credit in the three to six months prior to this, as it could affect your credit score and under the worst of circumstances, could lead to your application being rejected.
Lenders search your credit file every time you apply for a loan, a credit card, an overdraft, or even a mobile phone or utility contract. This search will be registered on your file even if you don’t end up taking out the contract. The more searches you have in a short time, the less likely you are to be granted credit, because this gives the impression that you are becoming desperate.
If you really need to apply for credit, it’s unlikely that one application is going to have a negative impact, provided it’s affordable. WARNING – if you are applying for a payday loan, some lenders will decline you for a mortgage and furthermore even if you’ve had one in the past year.
Rent payments CAN improve your credit score.
Are you currently renting, and do you pay on time? Assuming you do, there is a scheme available, which is free, and used by thousands of private renters and those in social housing, that allows your rent payments to help build your credit history and score.
The scheme was launched by Experian and The Big Issue Group in 2016, and by opting into the rental exchange initiative (Rental Exchange Initiative) your rental payment information gets recorded on your credit file.
This scheme is a very clever way to build up a credit history if you are trying to improve your credit file. It is important that you pay on time, so if there is a risk that you are going to miss your payments, you must be careful as it could harm your rating, doing more damage than good.
An overdraft is for emergencies only!
If you find that you are constantly living in your overdraft, lenders will look at this as you being close to the edge with your finances. If possible, you should avoid this, and look at your overdraft as being for emergencies only. Some lenders are so strict that if you have used your overdraft in the last 3 months, they won’t entertain your mortgage application.
This is going to sound harsh but if you are constantly in your overdraft and unable to get out of it, should you really be applying for a mortgage?
Always pay bills on time
It sounds obvious doesn’t it, but many people don’t. You should, ALWAYS!
Missed AND late payments show on your credit file, and count against you, so ensure that you keep everything up to date and pay on time.
Credit providers will and do register defaults against you, and these count against you for at least a year. They remain on your file for 6 years. All it takes is for you to miss one payment, and that can mean the difference between you getting a mortgage and not. Is it really worth missing your mobile phone payment?
To ensure you don’t find yourself in this situation you should ensure that all your bills are paid by direct debit.
Get your paperwork in order.
When applying for a mortgage, lenders want to see many different documents, in particular they will want evidence of your income, so you should make sure that you have everything in order and prepared in advance. It really will help your chances and speed up the process immensely. If you can provide all your paperwork in one go, whether to a broker or lender directly it can and will make all the difference.
The following is a list of all documents a lender is likely to want to see (and generally they require originals):
- A copy of your passport or driving licence.
- Your last three months’ bank statements
- Your last three months’ payslips
- Proof of bonuses/commission
- Your latest P60 tax form (showing income and tax paid from each tax year)
- Your last three years’ accounts or tax returns (SA302’s and Tax Year Overviews)
- Proof of deposits (e.g., savings account statements)
- A gift letter – generally only accepted from close relatives, the lender wants to know you don’t have to repay it, and that the giftor wont own part of your home.
If possible, cut back on spending.
In 2014 new rules came into force, which means that lenders must ‘stress test’ your ability to be able to pay your mortgage at different (increased) interest rates. To help them do this lender will do affordability checks.
Lenders will ask you for a lot of information in relation to your income and outgoings. They will want to check your bank statements for the last 3 months to check your income matches your payslips. They will also be looking at your day to day spending to ensure that you don’t live beyond your means.
As a result, it is worth reducing your outgoings in the months preceding an application. Avoid things on your bank account like spending in your local, online betting or even visits to a casino!
If you can, try and live on a shoe-string budget in the run up to buying because it is an expensive process. Every little that you can save will help you especially when you consider all the different costs involved.
If you have been able to save some extra funds as mentioned in the previous point, now is one of the times that they could come in useful. Being in a position to be able to put down a little more than the minimum deposit required can boost your attractiveness to the lender.
All mortgages have a maximum loan-to-value (the amount you can borrow compared to the property’s value) but if possible, it could improve your chances if you can borrow just under this. Here’s an example:
Instead of applying for a £170,000 mortgage on a £200,000 property (where the loan is 85% of the property value), apply for mortgage of £169,500 could really help your chances.
Complete application forms correctly
When you complete your paperwork (even if a broker is helping you) make sure that you follow the following rules:
State your income EXACTLY. Do not round it up.
Give your FULL NAME – even the middle names.
Declare ALL your debts. The lender will find them so trying to hide this information will result in a decline.
Get your three-year address history EXACTLY right, including postcodes.
Provide HONEST answers when asked about your expenditure.
Try a mortgage in principle.
If you have done all of the above, then your finances should now be in top shape. Why not put this to the test and see if you can get an agreement in principle either from a lender directly or via a broker.
This type of agreement is a conditional offer from a lender saying that you may be accepted if all information you have provided can be verified. Be aware though, it is not a guarantee, but for first time buyers in particular, it demonstrates to estate agents that you should be able to complete the purchase without problems. As a result, it improves your chances of having your offer accepted.
It may be best to use a broker to do this, rather than walking up and down the high street visiting all banks within a one-mile radius, because too many checks in a short space of time, and you really damage your chances with your actual mortgage application later on.
Not every lender will like you!
Every lender is different, and they all have different criteria and processes that determine if they will provide you with a mortgage. If you meet a lender’s criteria, there is a good chance you will be accepted quickly. If not, you could be rejected.
However, as with everything in life, things are not black and white, so here are a few things that could impact on a lender’s decision:
- Your employment status and income
- Your outgoings
- Your existing debt
- Your credit rating.
- The size of mortgage you require.
- How much deposit you have?
What happens if you’ve been declined?
STOP and do not panic!
Don’t fall into the trap that many do and start applying with many different lenders. After all the hard work you have done on your credit score, this could destroy it.
The first thing that you need to do is check your file again. You might have missed something. If after checking you find that you did miss something, go back to the top of this checklist, and start again.
If on the other hand you haven’t and your file looks fine, it is likely that it is just the lender you have applied through. As we pointed out, every lender is different with different criteria, so it doesn’t necessarily mean that the next lender will decline you.
Therefore, we recommend that you use a good broker (that’s us!) to look at your situation, they generally have a very good understanding of each different lender and the chances of you being accepted.