Applying for a mortgage can seem intimidating, even more so when you’ve got debt – but don’t worry! There are ways that you can show lenders you’re able to meet their requirements. Even if you’ve used a short-term loan to help you out of an emergency, mortgage lenders will take your reasoning into account and your application may not be affected. If you’re hoping to get a mortgage but you’ve racked up a bit of debt in the past, read on to find out more about how you can give yourself the best chance of being accepted.
What is a mortgage?
A mortgage refers to a loan that homeowners use to purchase a property. The homeowner borrows money from a lender, usually a bank, to secure a property and the loan is then repaid in instalments with interest. There are several different types of mortgages available depending on the lender that you choose – it is also necessary that the borrower meets requirements set out by the lender such as deposits, credit scores and affordability. You can pay a mortgage off over the number of years that you choose, the longer the mortgage term, the smaller the monthly repayment.
Can you get a mortgage with debt?
If you’re looking to get on the property ladder, you might be worried that the debt that you’ve not managed to pay off yet will impact your chances of being approved for a mortgage. You can get a mortgage if you have debt, and although it may be more difficult with some lenders than others, but your chances are not completely ruined.
One of the main factors that lenders will consider is what they call a ‘debt-to-income’ ratio. In general, banks will look at how much of your income is lost to debt and make a decision based on the result. You are more likely to be approved for a mortgage if your debt payments are low and your income is high. If your debt repayments eat into a lot of your monthly income, getting a mortgage may be more difficult, as a mortgage is after all a loan, and the more debt you have, the more of risk lenders would be taking when it comes to you making the repayments.
When it comes to mortgages, lenders will look at your history – the types and amount of loans you still have to repay. Lenders may be more lenient with some loans than others, for example, a car payment each month is generally acceptable. However, credit card debt and payday loans are not helpful when it comes to standing you in the best position with lenders. And it’s not just the numbers or amount of debt that matters so much either – a lot of lenders will take the time to learn why and how you’ve accumulated your debt.
If there has been a certain time in your life that has meant you’ve had to borrow money or take out a loan, such as if you’ve suffered illness and not been able to work, or you’ve had unexpected expenses like a broken boiler or damage to a property, lenders will hold this in higher regard than if you couldn’t explain what you’d been using the additional credit for.
If your credit history is less than impressive, there are things that you can do before applying for a mortgage that can get you to where you would like to be financially. Some lenders specialise in mortgages for people with poor credit, so all is not lost if you have found yourself with a lot of debt in the past.
There are a few things that lenders need to consider when deciding if they can offer you a mortgage. An affordability assessment is a way for lenders to protect themselves, as well as you, so that they know you’ll be able to make the repayments and can work out the amount of risk there is when lending to you.
When taking part in an affordability assessment, you will be asked questions regarding your employment status and income, your credit history, any monthly outgoings, as well as any allowances that you claim or are entitled to. Once the lender has carried out their affordability checks, they will make a decision on whether they think it would be wise to lend to you. If they come across anything that they consider a cause for concern, you may be offered less than you’d hoped for, or your application may be declined.
Before applying for a mortgage
If you’re applying for a mortgage and you’re worried about lenders declining your loan application, there are ways that you can make sure you’re in the best place financially before the process begins. One of the first issues to address is your monthly outgoings – if your lender thinks that they are excessive, they may not think you’ll be capable of paying the loan back. If you have subscriptions that you never use, be sure to cancel them, or if you have a habit of splurging on luxury items, now would be the best time to stop.
Keep a record of your spending so that you can see where your money is going and if there are products and services that you could cut back on, or swap for a lower monthly payment, like a mobile phone or internet provider. Make sure you’re reviewing your bank account regularly and make savings where you can. Saving is important as it shows lenders you are planning for your future.
A great way of improving your chances of being accepted for a mortgage is to make sure you’re regularly paying off your debt and improving your credit score. If you’re thinking about applying for a mortgage in the future, building up your credit score is important to show lenders that you are trustworthy when it comes to making loan repayments.