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Why mortgages are rejected and how to avoid it

18th August 2019 Print

Every day there are prospective home buyers who fill out mortgage loan applications and then cross their fingers and hope for the best. To say it can be nerve-racking is to greatly underestimate how anxious people get when it comes time to apply for a mortgage. People get anxious because they are afraid that they might be declined.

Mortgage rejection rates peaked during the financial crisis at nearly 9 out of every 10. Today, rejection rates are considerably lower. Indeed, your chances of being approved for a mortgage are greater now than they have been in years past.

So why are mortgages still rejected? There are lots of reasons. Five of those reasons are described below, followed by helpful information on how to avoid being denied a mortgage. You might also want to look for a useful article on mortgage rejections written from a lender's point of view to supplement what you learn here. Understanding the lender's position makes it easier to get a handle on your own.

5 Reasons Mortgages Are Denied

Mortgage lenders have a responsibility to their businesses and clients to not approve mortgage applications that appear too risky. As such, they also have a responsibility to diligently work toward determining the credit worthiness of every new applicant. They look at everything they possibly can to that end.

If you have applied for a mortgage and been denied, here are five possible reasons that could explain the rejection:

1. Poor Credit Rating

Also known as 'credit score', your credit rating is a mathematical representation of your ability to pay your bills. A poor rating suggests you have had financial trouble in the past. It also suggests that you might be too risky a candidate for mortgage approval. Your credit rating can be harmed by overdrafts, paying your bills late, defaulting on debt payments, overspending on credit cards, and more.

2. Your Age

When all other things are equal, people between the ages of 18 and 24 still have the hardest time securing mortgages simply because of their youth and lack of experience as consumers. Lenders know that there is a lot to be said for age. They also know that younger people may not have a thorough understanding of sound financial management. This makes them a greater risk.

3. Use of Certain Kinds of Credit

There are certain forms of credit that cause lenders to suspect you do not manage your finances well. Payday loans are a good example. If you have a history of payday loans, you may have trouble getting a mortgage. Some payday loans can stay on your credit report for up to six years if you miss even one payment.

4. Insufficient Income

You could be over the age of 24 and with all of your financial ducks in a row and still be denied for insufficient income. This is pretty straightforward. If you do not have the income to support the mortgage you are applying for, you will not be approved.

5. Insufficient Deposit

Lenders look at something known as the loan-to-value ratio (LTV) in order to determine whether or not to approve a mortgage. This ratio is affected by the amount of money you have to put down as a deposit. A deposit insufficient to satisfy bank requirements is often the cause of denial.

How to Avoid Being Denied

Sound financial management and adequate income go a long way toward making sure your mortgage application is not denied. But there is something else you can do: use a mortgage broker rather than going directly to banks and building societies.

A mortgage broker will look at your entire financial situation before proceeding. He or she will be able to assess where you are at and then look for mortgage deals that fit your circumstances. In short, mortgage brokers are not one-size-fits-all professionals in the same vein as bank loan officers.

Follow Your Broker’s Advice

Mortgage brokers in the UK are also financial advisers. Take advantage of that. If your broker offers you some advice about how you can reduce the chances of being rejected, follow that advice. Your broker knows what he or she is talking about.

Your broker might recommend that you hold off on buying a house until you can clean up some past credit problems. The advice might be to wait for three months, six months, or even a full year. Again, trust your broker. It is far better to clean up your credit than rush into a mortgage application that could come back rejected. Waiting could also mean better rates and terms when you finally do apply.

Being denied a mortgage is never a pleasant experience. And although rejection rates have fallen drastically in recent years, people still are denied for a variety of reasons. The best advice anyone can give you is to reduce your chances of rejection by working with an independent mortgage broker. Following your broker's advice should put you in a good position for approval.