When you apply for a mortgage, lenders will want to see whether you’ve managed debts responsibly in the past, and will therefore look at your credit history. If you have a low credit score, they may consider that the risk of you not being able to pay back your mortgage payments is too high, and refuse your application. A poor credit score can be caused by various circumstances, such as missing a payment on your credit card or only paying the minimum payment each month, not paying mobile phone bills on time, making too many credit applications, not being on the electoral register, or falling victim to identity theft. Ironically, if you’ve never even taken out a credit card, or any kind of loan, then your credit score may also be affected as lenders won’t have enough data on your repayment history to be able to make an assessment of how you have managed your borrowing in the past.
Before making a mortgage application, it can be helpful to take a look at your current credit report, and check there are no mistakes on there. There are three main credit scoring agencies in the UK – Experian, Equifax and TransUnion (formerly Callcredit) where you can check your credit score. If you don’t want to pay to access your credit score, there are a number of marketing services now offering to give you access to your credit score for free. For example, ClearScore offers a free credit checking service that accesses Equifax data. They also offer free identity protection that scans for stolen passwords, security problems and fraud defence tips. MoneySuperMarket’s Credit Monitor tool enables you to check your credit score and report free of charge using data from TransUnion. Additionally, Experian has a free service that enables you to sign up and check your credit score with them.
If you do spot a mistake, many of the services above will have a process where you can ask them to correct errors on your file, although it might be quicker to contact the lender themselves and ask them to correct any mistakes if things don’t look right or they have put a mark on your credit file incorrectly. If things look correct and your report has a few issues flagged, then it will be helpful to spend some time looking at ways you might be able to improve your credit score before applying for a mortgage. You might find our article Seven steps that could improve your credit score helpful.
The mortgage payments may be deemed unaffordable
When deciding whether to approve your mortgage application, mortgage lenders will take into account your income and expenditure to determine whether you’re likely to be able to afford the regular mortgage repayments. To do this, they will assess your income, outgoings and any outstanding debts that you have. They are also required by the financial regulator to ‘stress test’ how affordable the mortgage repayments would be if interest rates were to rise – sometimes quite substantially. To get an idea of the amount you can afford to borrow, you can use this mortgage affordability calculator from the Money Advice Service.
If your lender has declined your mortgage application because it thinks it is unaffordable, other options that you could consider include requesting a smaller mortgage, considering a retirement interest-only mortgage or a lifetime mortgage, seeing if you’re eligible for one of the government home buying schemes, or looking into shared ownership.
If, like many people, you’ve recently experienced a fall in income or are struggling to budget, you might like to read our article Budgeting if your income has reduced, or consider using this budget planner to help your money go further.
Mortgage providers are only human, and there’s always a chance that they could have made a mistake when recording the details of your application on a computer. This can sometimes be the reason behind a failed application, and it’s more common than you might think. Something as simple as having the incorrect house number for your address can lead to an application being declined. While it’s unlikely that a lender will share with you the specific reason why your mortgage application failed if you have checked your credit file and it all looks OK, it might be worth running through the application with them to double check that all the information they have is correct.