As banks tighten lending criteria thanks to the Covid-19, people who are self-employed or contract workers are more likely to be denied a home loan.
More than a third of would-be first-time buyers have been rejected for a mortgage, a recent survey has found.
Lenders have tightened their credit criteria amid the coronavirus pandemic and the number of mortgage products available has halved year-on-year.
In this climate, around 35% of people trying to get on to the property ladder have had at least one mortgage application turned down, with a further 10% of prospective buyers rejected multiple times, according to the research by Aldermore Bank.
Nearly two-thirds (62%) of the 1,000 people surveyed by the bank in August said buying a home feels less achievable in current economic conditions.
The self-employed and contract workers were the most likely to be rejected according to the survey (23% of applicants).
The second-biggest reason for not obtaining a mortgage was not having a large enough deposit (18% of applicants).
Other common issues encountered by prospective buyers included not having a high enough salary and having a poor credit history.
Why is this happening?
The coronavirus pandemic has led to many banks and building societies tightening their lending criteria as they reduce the amount of risk they are willing to take.
On the one hand, this tightening has led to the withdrawal of mortgages for borrowers with small deposits, while lenders are also more reluctant to advance loans at high salary multiples.
At the same time, they are also more wary of people with irregular incomes.
Finally, banks are less likely to be prepared to lend to people who do not have a solid credit history.
Who does it affect?
The research suggests would-be buyers who are self-employed or contract workers are most likely to struggle to get a mortgage.
But those with less than perfect credit histories could also face difficulties, with 15% of people surveyed saying they were turned down because they had made too many credit applications.
While 13% were rejected because they had taken out a payday loan and the same proportion again were unable to get a mortgage because they owed too much debt.
How can I improve my chances of getting a mortgage?
The good news is that there are a number of steps first-time buyers can take to increase their chances of having a mortgage application accepted.
1. Save a bigger deposit: The larger your deposit is as a proportion of the property you want to buy, the less risk you represent to a lender. Increasing the size of your deposit will not only make you more likely to be accepted for a mortgage, but it should also mean you have more choice, as there are currently more mortgages available in lower loan-to-value tiers.
2. Check your credit record: A mistake on your credit record could lead to you being turned down for a mortgage. As a result, it is worth looking at a copy of your credit record held by the three main credit reference agencies TransUnion, Equifax and Experian to ensure everything is accurate and up to date.
3. Register on the electoral role: Make sure you are registered on the electoral role as lenders will use this to verify your personal details when you apply for a mortgage.
4. Reduce your debt: Reducing any outstanding debt you have will help to increase your chances of getting a mortgage. Close any credit cards you have that you don’t use and try to repay any outstanding balances on ones that you do use. If you cannot clear your balances in full, try to repay more than the minimum amount required each month. It is also important to avoid late payments as these will impact your credit score.
5. Reduce your spending: Affordability plays a key role in the mortgage application process, and alongside looking at your salary, lenders will also look at your outgoings. Cutting back on your spending so that you have more spare cash each month, will make you look more attractive to lenders.
6. Have a regular income: Having a regular income or stable job will increase your chances of getting a mortgage. As a result, it may not be a good idea to move jobs immediately before applying for a mortgage. If you have recently changed jobs, it may be worth waiting before you submit a mortgage application. If your income is erratic, see if there are any steps you can take, such as doing more overtime, to make it more stable.
7. Pay your bills on time: Make sure you pay utility bills on time, as being late settling these can also hurt your credit score. Consider setting up a direct debit to ensure you are always on time.
8. Use a broker: Using a mortgage broker can increase your chances of qualifying for a mortgage as brokers will be able to advise you on which lenders are most likely to accept your application. They can also help you get all of your paperwork in order, smoothing the mortgage application process.
Top three takeaways
Almost half of first-time buyers have been rejected for a mortgage as lenders tighten their credit criteria
Around 35% of people have had at least one mortgage application turned down, while a further 10% have been rejected multiple times
The top reason for being declined was being self-employed or a contract worker, cited by 23% of applicants, followed by not having a large enough deposit at 18%
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