The number of mortgage applicants rejected by lenders has surged 400% since the credit crunch began.
During the days of easy credit, lenders were offering mortgages to anyone who walked through their doors.
But as the inevitable backlash began, research shows that lenders have swayed too far towards caution, rejecting a number of viable candidates.
Same criteria, more rejections
Roughly 2.3% of vetted mortgage applications were rejected in 2007, according to moneysupermarket.com, compared to 8.8% so far this year.
Significantly, all the applications were qualified against the lender's criteria prior to submission and on paper appeared to fit, but lenders still found reasons to reject them.
“Lending criteria has become too strict,” says moneysupermarket mortgage head Louise Cuming. “Even vetted applications that we would expect to be accepted without a hitch are being rejected.
How to boost your chances
So what can you do to increase your chances of being accepted? The first thing to keep in mind is affordability. Back in the day, lenders were offering
mortgages anywhere up to ten times an applicant's salary.
The market has since regained its sanity, and the highest you can reasonably expect to borrow now is four to four and a half times salary (for single applicants).
Of course, when it comes down to actually approving a
mortgage, a lender will want to look beyond simple income multiples and consider your financial situation. This means everything from outstanding credit card debt to the number of dependants will all affect your chances of being accepted.
Another factor to keep in mind is the size of your deposit. While 25% is generally considered the norm, you will get away with anything down to 10% - provided you a willing to pay a far higher rate.
Credit rating is key
Perhaps most importantly, you need to ensure your credit rating is blemish-free.
Your credit report is essentially your passport to all the best deals on the market, so any problems here will affect your chances.
Here is a comprehensive list of steps you can take to repair your rating.
Take a peek at your report: Your first task is to get hold of your credit report from any of the
credit reference agencies and check for any possible errors.
Don’t worry; it’s a fairly short and straightforward document, so any mistakes will be easy to spot. For those whose can’t find any, yet have still been rejected for credit or not been given the advertised rate, the most likely reason is that your credit rating is simply too good.
If you are financially prudent it means you’re unlikely to accrue interest – i.e. profit for the bank – and thus banks penalise your by hiking the rates or rejecting you outright. Similarly, having no credit history whatsoever will count against you.
While the fact you have lived within your means for so long is respectable, it doesn’t change the fact lenders have no idea how reliable you will be, and so you can expect a lower credit limit and/or a less competitive interest rate.
What lenders score you on:
• Your payment history
• Amount of debt outstanding
• Overall length of credit history
• Type of credit used
• Type of new credit requested
Get on the electoral roll: Quite simply, if you’re not on the electoral roll, you’ll struggle to get any credit.
This is because credit reference agencies find all the information on you here. Get in contact with your local council to check. If you aren’t eligible to vote, forward your proof of residency to the three
credit agencies and request that they make note of this.
Get rid of old baggage: Obviously if you have a lot of unpaid debt, this will count against you. The more you owe, the worse your rating will be. Try to pay this off as soon as possible – settling a loan early will be well received by future lenders.
As for credit cards, it’s important you limit the number of active cards you own at any given time. Even if you’re not using the cards and don’t owe a penny on them, the fact you have such a “long line of credit” available to you already looks bad.
If you have more than two cards already, contact the provider/s and let them know you want to cancel the account/s (just cutting it up won’t work).
Don’t miss debt repayments: Quite straightforward really. If the bank sees you have a tendency to miss payments – even once or twice – it can count against you for up to six years. Considering your credit history counts for 35% of your credit score, this is a really important issue.
Setting up direct debits or standing orders will help the forgetful among you. For those who defaulted at some point due to lack of funds, make sure you get a notice of correction put on your record that explains the circumstances.
Factors that DON’T affect your score
• Fines
• Criminal record
• Savings Accounts
• Medical History
Don’t apply for credit too often: Every application you make is noted on your credit record. If you apply for too many in a short space of time, this hurts your rating and makes each application less likely to succeed. Should you be rejected more than once, stop, go back to step one and check your credit report for any problems or errors.
If you’re applying for a loan, another option is to ask each lender to carry out a quotation search rather than a credit search. What’s the difference? A quotation search won’t hurt your credit score. Unfortunately, a lot of lenders don’t offer this service, but it’s certainly worth checking anyway.
Rebuild your credit: If you have a poor credit history or no credit history at all, there is unfortunately no quick fix solution to boosting your score. There are however some credit cards that have been developed specifically for people trying to rebuild their credit rating.
These cards are offer terrible value, with very low credit limits and extortionately high interest rates, so it’s essential you tread carefully when using them.
Make small purchases on the card that you would have bought with your debit card/cash anyway – such as groceries – then pay the card off immediately (the cards do offer up to 56 days interest free, but the longer you wait, the greater the chance you’ll forget to pay it off).
For those with particularly a poor credit history, the
Vanquis card is an option, but it charges between 40 - 60% interest, so you could end up in a world of trouble if you’re not careful.
Stability and responsibility are key: It’s not just your credit history that affects your rating. Lenders look favourably upon those who tend to have more continuity in their lives. If you have lived at your current address for three or more years or stayed in the same job for a few years, your rating will increase.
According to the
Debt Advice Bureau, changing jobs once in three years won’t blemish your record, but three or more jobs in the same period will. Responsibility is another trait that will boost your rating, with homeowners given a higher rating than those who rent, as this shows you’re more likely to be able to handle large debt.
Not just your finances to worry about: As a final point, anyone who is financially linked to a person with a poor credit rating will be adversely affected. This can be a joint credit card or simply having both your names on a utility bill.
If you or your partner has an adverse credit history, make sure you keep as much of your finances separate as possible. Note that being married or living with someone who has a poor rating will not affect you – it must be a financial link.
