If you have debts, you may be concerned they could hold you back from getting a mortgage and buying your first home.
But do you really need to worry about this? Well, the good news is your debts might not necessarily prevent you from being accepted for a mortgage. Read on to find out more.
What lenders look at
To get an idea of whether or not your mortgage application will be accepted, get to grips with what lenders look for when they consider you as a customer. There are four main things they’ll be interested in:
1) Your deposit - The greater the proportion of a property’s price you’re able to pay for with your deposit, the better your chances of getting a mortgage with an attractive APR. This is because the lender’s stake in the property will be smaller and so less risky.
2) Your income – If your income is only a little more than the payments on the mortgage you’ve applied for will be, there’s a good chance you’ll be turned down. Your lender doesn’t want to feel that your finances will be stretched too tight to comfortably afford your repayments.
3) Your outgoings – Like with your income, your lender will look at your existing outgoings to work out whether you’ll have enough cash free each month to also cover your mortgage repayments.
4) Your credit history – This is a record of all the lines of credit you’ve had open to you over the last six years and how well you’ve managed them. Some lenders may look at the maximum amount of credit you have available, rather than what you’ve actually used, so be sure to close any accounts you don’t use. Any late or missed payments you’ve made towards your borrowing will also show up here.
Now you know what mortgage lenders are looking for. But which of these areas do your debts affect? The answer is, almost all of them.
The lender you apply to will ask you about your regular spending commitments, from your debt repayments to how much you spend on going out each month. If a large part of your income is being spent clearing existing debts, this could affect your mortgage application.
Then there’s your credit history; even if you have a large enough income to cover your repayments comfortably and your outgoings are limited, if you have a poor credit history this will be taken into account. So, if you have had debts in the past that you’ve missed payments on, your lender will see this and it could affect their decision. If they don’t think you’ve proven yourself as a responsible borrower, they may be unwilling to lend to you.
Mortgages for borrowers with a poor credit history
If you have large debts, you should be prepared that you may not be able to borrow as much as you want, and the interest rate you’re offered may be higher than you hoped.
There are mortgage lenders who specialise in borrowers with bad credit histories. They will look at the same things any lender would when considering your application, but they’re less likely to turn you down because of a poor credit history. You should be aware, though, that the interest and charges attached to mortgages from these lenders can be quite high.
How can I improve my chances of being accepted?
As we said at the start of this blog, your debts won’t necessarily stand in the way of you getting a mortgage. And there are a few steps you can take to improve your chances of being accepted.
First things first; you should try and clear as much of your debt as you can before you apply. This is good for your credit history as it shows lenders you are taking steps to pay back what you owe. It’s also good for your finances, as having to pay less towards your debts means you’ll have more to put towards your mortgage.
If you have any lines of credit open to you that you no longer use, like an old store card or credit card for example, close them before you apply for your mortgage. As we said earlier, some mortgage lenders will take into account the total amount of credit you have available to you if you hit your maximum spending limits. They may even decide against lending to you based on this.
Finally, make sure you spread out your applications. If you’re turned down by one mortgage lender, it’s a good idea to wait before you apply again. Each application for credit that you make shows up on your credit history for other lenders to see, and if there are lots of applications close together it can make you appear desperate to borrow.
For more tips on successfully applying for a mortgage, read parts one and two of our blog guide.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.