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Three things that matter when taking out a mortgage with debts
Many of you live under the impression that a good credit score makes for a higher approval rate for a mortgage, but the reality is more complex than you think. Sometimes, you can be signed off on for a mortgage despite a bad credit rating, while other times, you may be turned down despite a good credit report. A mortgage lender will look at your overall financial situation to decide whether or not to give the nod.
Apart from your credit score, your affordability and the deposit size will be taken into account.
There is a possibility of getting approval for a mortgage with some outstanding debts, but the size of the debt can influence the amount of borrowed sum and interest rates.
What is the size of your deposit?
Lenders will probably prefer a larger deposit size if you already owe some debts. Having debts on your credit report will call your credibility into question. Mortgages are expensive, and they tie you with payments for a very long period of time. What if you struggle to keep up with payments due to other debts?
If you have one or two small loans like urgent doorstep loans, your lender will not be concerned about your repaying capacity much as long as you have a larger deposit. The minimum down payment required for a mortgage is up to 10%. Try to make it at least 20% if you have small loans.
Some people borrow money to put down a larger deposit. Unfortunately, this is a bad idea. Do not forget that it is increasing your debt amount. You will have to pay interest on top of that. A lender will make the decision based on the deposit you put down from your savings.
Borrowing money to make your deposit large can make it look like you are about to get the best mortgage deal, but the fact is that your chances of getting approval will be bleak. Your affordability will be questioned and therefore you can be turned down.
Sometimes, a larger deposit can also not work
The type of debt you owe is another factor that plays a role in deciding to approve your mortgage application. For instance, if you have very bad credit loans with no guarantor and no broker in the UK, a higher deposit will also not help you. A very poor credit score itself indicates that your past payment behaviour was not good at all. No lender will risk their money by lending it to someone who has a track record of missed payments and defaults.
What will be the impact of current debt on your mortgage affordability?
Affordability can also be a concern because of mortgage rates. The current rates are high, so even if you do not owe too much debt, you may fail to pass the affordability test by the lender. It is not surprising that your mortgage lender turns you down even if your mortgage costs you the same amount as the rent you have been paying so far.
It is because your lender will follow its own method to check your affordability. In order to make payments more manageable, people are tempted to choose longer repayment periods, but make sure not to bury your head in the sand while doing that.
There are consequences of choosing a longer repayment period as well.
>You will pay more interest over the whole repayment term.
>You will have difficulty buying your next house because of the lower capital you will have to pay.
>It can be difficult to keep up with payments when the financial situation is turned upside down.
A mortgage affordability calculator can help you get an estimate of how much you can get, but free online calculators include only basic features. They will make a decision based on your income and deposit. In reality, a mortgage lender will peruse your expenses, which, apart from your debt obligations, include childcare costs, medical expenses and other recurring expenses. Try to use a comprehensive calculator that includes the following details as well:
>The number of applicants
>The number of dependents
>The availability of any side gig
>Your debt details, including credit card bills
>The amount of deposit you have
As the amount of the debt goes up, the size of the mortgage you can qualify for will start reducing.
Outstanding credit card balances and loans with low payments significantly drop the mortgage amount you can qualify for.
What does your credit history look like?
Your credit file will be thoroughly checked. You should check with all three agencies because your mortgage lender can fetch your details from any of them. There is a chance that your credit report consists of unidentified accounts, wrong addresses, and debts that you never took out. It takes at least a month to get an error fixed in your report, so make sure that you check it a while before applying for a mortgage.
Maybe you do not owe any debt at this moment, but despite that, your chances of qualifying for a mortgage are very bleak if your credit history is not up to snuff. You should ensure that your credit file does not reflect:
>Late payments
>Defaults
>Missed payments
>County court judgements
>Bankruptcy
>Any foreclosure
How old your debts are is also an important factor
In addition to how much debt you owe, lenders would also see how old they are. If you are to settle those outstanding debts, of course, your credibility will be called into question. But sometimes, there are scenarios when people have just settled their accounts before applying for a mortgage. The settlement will work to your advantage, but when you settle, the debt is now a key factor in determining your affordability.
Some lenders will turn you down immediately, even if they are settled, while others may consider your application but will charge high interest rates. However, if your defaults are more than two years old, your mortgage lender will not bother about them.
The older the defaults and the missed payments, the less concern they cause to a lender. You should have at least two years free of debt problems before the date of a mortgage application.
Important tips for a trouble-free mortgage application
You should bear the following tips in mind to avoid any problems during the mortgage application process:
>Make sure you have not made any new credit inquiries in the last year before your mortgage application.
>Stay away from payday or any other small emergency loans in the last two years before applying for a mortgage.
>Be careful with mobile contracts. You must have been paying them on time.
>Do not sign up for any “Buy now, pay later” scheme in the last year before taking out a mortgage.
>Under no circumstances should you be running up an overdraft.
>Do not switch employers frequently.
The final comment
There are chances of getting a mortgage with outstanding debts, but you will end up with high interest rates and a restricted amount. This means you will have to make a larger deposit. However, most mortgage lenders cast aside the application if outstanding debts are large enough to affect your affordability.
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