Anyone who has applied for a mortgage over the past 18 months will know that tough new affordability rules have made it more difficult to secure a loan. Lenders are looking in forensic detail at borrowers’ income and spending habits, even down to the amount they spend on haircuts and dry cleaning in some cases.
To meet these tough requirements borrowers have had to become savvy and get their finances in order well before they apply for a mortgage. Most brokers recommend that this is done at least three months before lodging an application, but it can pay to change your spending habits up to a year in advance.
Most prospective borrowers know the basics – improve your credit rating by registering on the electoral roll, check for any credit file blemishes and avoid excessive spending in the run-up to the application. But here are some extra tips and tricks to help you convince a lender to give you a loan.
- Avoid payday loans at all costs.
- Put all expenditure, except things that cost extra if you pay by credit card, on a credit card (preferably one that gives you cashback or some other incentive) and pay it off in full each month. This makes your bank account look a little healthier because payment for expenditure is effectively delayed by a month, but more importantly when lenders see your bank statements they won’t see where you spend your money.
- Make sure all credit cards are on a direct debit to avoid the risk of missing a payment. If you can’t afford to pay the balance off in full each month set the direct debit for the minimum and pay whatever extra you can afford separately.
- Reduce any other borrowing (except any 0pc credit card balance transfer deals) by as much as possible before applying for a mortgage. Assuming the lender doesn’t consider your total debt to be excessive it is monthly payments, not outstanding debt, that determines your maximum mortgage. So someone who took out a £10,000 car loan a year before applying for a mortgage and chose a five-year repayment term would be able to obtain a larger mortgage than someone who borrowed the same amount over two years and had therefore paid about half of it off.
- Make sure you don’t exceed any overdraft limit, or go overdrawn if you don’t have an arranged overdraft. A badly managed bank account is all that’s needed for an application to be rejected, even if the applicant appears to have plenty of income, as it suggests a failure to manage money responsibly.
- If parents or grandparents are helping with the deposit, it has to be via a gift rather than a loan for it not to affect the affordability assessment. Parents must supply a letter declaring that it is a gift and will also have to provide evidence of where the funds are from, such as bank statements showing the transfer.
- The way you maintain your current account is very important and banks will ask for six to 12 months of statements to check this. So open a savings account with the bank you have your current account with and set an arrangement in place so that if you are going to go overdrawn your lender will automatically sweep the necessary funds over from your savings account to stop you going over your limit.
- Pay off loans and credit cards from savings so it is not considered committed expenditure, which would affect your income when the lender is calculating mortgage affordability.
- If you are self-employed talk to your accountant about maximising your verifiable income for accounting purposes at least 12 months in advance of making a mortgage application. This will ensure that you are demonstrating enough income to get the loan you require.
- Set up a file that contains 12 months’ bank statements (make sure none are missing and order replacements from the bank if they are) and three to six months’ payslips; if you are self-employed include three years of accounts or SA302s or tax returns; you’ll also need a utility bill and a copy of your passport; as well as a full and detailed income and expenditure summary. That way you will be organised and ready to go when it comes to making your mortgage application.
- Run your bank account as if you already have a mortgage for at least three months before applying for a loan. Avoid excessive spending, cut unnecessary subscriptions and memberships and don’t spend money on betting – lenders don’t look kindly on it.
- If you work on a commission basis at all it is helpful to make sure that the three months leading up to your application show good steady levels rather than ups and downs. This will improve your borrowing capacity.
- If you’re self-employed, make sure the latest possible accounts are prepared and submitted to HM Revenue & Customs.
- Don’t make an offer on a house and then go on holiday. This sounds obvious but it happens quite a bit. Some borrowers do not realise how much paperwork is involved with a transaction and that lenders can request more information. Being away during the process can slow things down dramatically.
- Make sure you have a good estate agent, a good mortgage broker and a good solicitor. Together they cover every base and ensure a transaction goes through as smoothly as possible.
For any help and advice on every aspect of your mortgage application, contact Samantha Allnutt of WBW Mortgages to book in for an initial free no obligation meeting and let her get you in your new home – 01803 500544 or firstname.lastname@example.org.