With 1 out of every 5 mortgage applications rejected in the UK, there are a number of things you can do to improve your chances of being successful.
A mortgage is often essential to buy a home or flat; very few people are able to buy a property outright or as a cash buyer.
A lot of estate agents will not even let you see a property unless you have a mortgage approval or decision in principle.
There are a number of factors that affect your mortgage application; such as your income, credit score and employment status. Being on top of these can help improve your chances of approval and purchase the property you want.
Find a mortgage that suits you
You’ll need to consider how long a deal you should go for, whether you are looking at something fixed or over 3, 5 or even 40 years.
You can apply for a mortgage directly with your bank or any other high street bank. Some people prefer to use mortgage brokers to get the full scale of offers from all the banks, private lenders, financial institutions, building societies and challenger banks.
Types of mortgages
The main feature of fixed-rate mortgages is that you will pay the same interest rate for the entire period of your mortgage, regardless of interest rate changes enforced by the Bank of England.
The most common deal periods for fixed-rate mortgages are for two and five-years. After you reach the end of your fixed term, you'll usually be moved on to your lender's standard variable rate (SVR).
A variable or adjustable-rate mortgage is one where the interest rate can increase or decrease in line with the base rate it is linked with.
If you have a variable-rate mortgage, your monthly payments will fluctuate in line with that rate for the length of the initial deal.
How to maximise your chances of getting approved
Make sure your credit history is in order
The better your credit history, the more favourably a lender will view your application.
The three main credit agencies you can check your credit report with are:
Check your credit report carefully, take a note of any mistakes, and then get them corrected with the credit agency. A mistake could lower your score and damage your ability to get credit, including a mortgage.
If your credit history is not very strong it may take some time to build it up. Lenders typically prefer candidates with a higher credit score, as it shows reliability.
Increase the size of your deposit
The minimum deposit you need to save up in the current market is usually 5% of the property's purchase price.
However, if you can build up a larger mortgage deposit this will boost the odds of your application being successful. This can also mean you are more likely to be approved for better mortgage deals with lower interest rates.
Lower your debt-to-income ratio
Your debt-to-income ratio compares the amount of debt you have to your overall income. Lenders look at your debt-to-income ratio to measure your ability to make your monthly repayments, and to determine how much you can afford.
The best way to reduce the ratio before applying for a mortgage is to pay-off any outstanding debts.
Lenders prefer to see debt-to-income ratios that are 36% or lower, with no more than 28% of that debt going toward mortgage payments.
If you are self-employed
When you are self-employed and applying for a mortgage, typically you should have at least two years of trading history or accounts.
It is ideal to be ‘cash positive’ or have a profitable business, since this will instil confidence for prospective lenders and mortgage providers. However, if you are not in profit, this is not necessarily a reason to be rejected, since some small businesses or start-ups often make losses before making huge profits.
Applying for a mortgage
Once you have found a suitable mortgage and increased your chances of getting approved you may want to make an application ‘in principle’. This involves a lender agreeing 'in principle' to give you a mortgage, subject to final checks and approval of the property you intend to buy.
Once you have had your offer on a property accepted, you can formally apply for your mortgage.
You will need to prepare the required documents, including proof of your identity, address and employment. You will also need your bank and credit statements.