What to Do if Your Mortgage is Declined Due to Affordability
If you have looked at getting a mortgage you will probably be familiar with an affordability calculation. Passing an affordability calculation can be problematic though and many borrowers struggle to understand how affordability works.
The good news is an affordability calculation is fairly straightforward and this article explains everything you need to know. We also look at what a rejection at Decision in Principle stage means and what to do if you are declined during a full mortgage application.
Let’s explore affordability in detail.
What is an Affordability Check?
Simply put, an affordability calculation is a lenders’ way of evaluating whether you can afford to pay the mortgage. It acts as a stress test for lenders to reduce the risk of them lending you money.
A typical affordability calculation will allow you to borrow up to 4.5 times your annual salary. Some lenders have tighter income multiples and there are even a handful of lenders who will extend up to 5 times your annual salary. For example, if you earn £20,000 a year, a lender offering 5 times your salary will set the maximum loan amount at £100,000.
Affordability isn’t limited to income though and this is where most people encounter problems. A lender will assess your expenditure and reduce the amount you can borrow in line with your expenses.
What Expenditure Affects Affordability?
All outgoings you have will be considered with affordability. Some expenditures will have a higher impact than other outgoings. High impact outgoings tend to be existing debts or significant monthly commitments, such as:
- Car finance
- Rental payments
- Official expenditure such as child or spousal support
Other outgoings will be considered but may not necessarily have much impact, such as:
- Monthly subscriptions
- Food and clothing costs
- Fuel and insurance costs
Each lender has a different way of evaluating your expenditure. Some lenders will be strict about child support for example, whereas others might be more lenient. Part of a mortgage brokers job is to match your specific financial circumstances with lenders that match your financial profile.
Why Would a Mortgage be Rejected on Affordability?
There are two main reasons why a mortgage may be rejected due to affordability.
Income – if your income isn’t sufficient to reach the amount you wish to borrow. For example, earning £50,000 and expecting to be able to borrow £500,000.
Expenditure – if your outgoings reduce the amount your can borrow and prohibit you from achieving your desired mortgage amount.
It is important to note that you may pass a Decision in Principle on affordability only to have your full mortgage application declined. Unfortunately, this is quite common.
When you proceed to a full mortgage application you will need to demonstrate to a lender your income and expenditure by providing payslips or Tax Calculations & Tax Year Overviews (for the self-employed) and bank statements.
If the evidence doesn’t match up to the information provided at the Decision in Principle stage, it can cause your lender to decline the mortgage. For this reason, it is sensible to ask a reputable mortgage broker, like Boon Brokers, to review all income documents and expenditure at the start of the process.
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Other Reasons a Mortgage May be Rejected
Alongside an affordability calculation, lenders also conduct other checks. You should expect to have your credit score checked twice and a survey of the property you wish to purchase.
Credit Scoring – You can get a mortgage with only one credit check if you skip the Decision in Principle stage. Skipping a Decision in Principle is not advisable though as you have a higher chance of overlooking something that causes your application to decline. With the vast majority of lenders, a decision in principle will be mandatory.
In most cases this means your credit score will be checked at Decision in Principle stage and when you make a full mortgage application. If your credit score drops between these two checks it can cause your mortgage application to decline.
Property Checks – Each lender has strict property criteria – some being stricter than others. Some lenders will not lend on properties with a thatched roof for example. If your property doesn’t meet the lender’s guidelines it will cause the mortgage application to fail.
What to Do if Your Mortgage is Rejected
If you are rejected at the Decision in Principle stage, you should discuss your situation with your mortgage broker. If you haven’t approached a mortgage broker prior to a Decision in Principle you should take this opportunity to contact one, like Boon Brokers, and find a lender more suitable for your situation.
If you have discussed your circumstances with a mortgage broker, they shouldn’t be submitting a Decision in Principle unless they expect a high likelihood of a positive outcome. Sometimes something unexpected can happen even when using a mortgage broker, such as a historic debt or a problem you forgot to mention to the broker. Go over the reasons for the rejection with your mortgage broker or contact Boon Brokers for a FREE, no obligation second opinion.
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What to Do if Your Mortgage is Declined
Once you have a Decision in Principle you can be reasonably confident of a successful mortgage application if nothing changes in your circumstances, and you can evidence everything declared to a lender.
If you are using a mortgage broker, it is rare for a mortgage to be declined on application. A competent mortgage broker will have documentation ready for the application and will know what evidence a lender will ask for.
A mortgage application can still however be declined at application stage and if this happens you will need to find out the reason for the decline. If you have applied directly to a lender, this information can be difficult to obtain, especially if an underwriter has declined the application without putting many notes on your file.
A mortgage broker will be able to approach an underwriter directly and ask for more information. In some circumstances the underwriter may have made a mistake and a broker can file an appeal on your behalf.
If the application remains declined, your broker will have more information available to them to select a lender more appropriate for you. For example, if the survey shows something untoward about your property, a broker will find a lender who will accept that property for the next application.
Because credit searches show on your credit file for mortgage applications, you should not apply to multiple lenders as this can cause a decline due to a damaged credit score.
Boon Brokers is a UK-based Whole of Market Mortgage, Insurance and Equity Release Brokerage. With us, you’ll receive FREE no obligation mortgage advice, no matter your current stage of the mortgage process.