How to overcome a mortgage decline.
Mortgage decline ! These are the two words anyone who is applying for a new mortgage hope never to hear.
Those words can signal the end of buying your dream home, or your chance of securing a cheaper remortgage payment. However soul destroying it is being told your application wont be progressing further, sometimes it is a blessing in disguise. In this post we look to cover some of the reasons a mortgage may be declined. Including whether a decision can be reversed and how to make a plan moving forward.
Today we will cover:
What causes a mortgage decline?
Many situations can cause a mortgage application to be declined. Technically speaking a mortgage lender can decline a mortgage at any time and for any reason. Therefore, there is never a cast iron guarantee of any application succeeding through to the point of completion. Over the years we have seen many weird and wacky reasons given by a lender when choosing not to proceed. Some of the more common reasons are given below.
- Credit scoring
- Undisclosed credit commitments
- Debt to income ratio
- Unsatisfactory property valuation assessment
- Income not acceptable
- Application does not meet the lending criteria
- Application keying errors
- Multiple / overseas addresses
Credit Scoring
Almost all lenders carry out a credit score / search whenever a new mortgage application is submitted. This is usually completed at the point a decision in principle is requested. A decision in principle is used to provide confirmation of your borrowing budget before a property has been found. It uses information relating to your income, committed outgoings, address history etc and combines it with a credit check. This often leaves a soft footprint on your credit file. Although some lenders will leave a hard record of their investigation.
Should the credit check not meet the lenders requirements, they may opt to refuse the mortgage application altogether. Sometimes you may be provided with an alternative lending proposition. This could mean increasing the deposit amount, reducing the maximum mortgage amount possible, or by offering a more expensive mortgage product to offset their risk.
What many people do not realise is that their respective ‘credit score’ isn’t the benchmark being assessed by the lenders. I have seen applicants with a credit score of 999 out of 1000 be declined for a mortgage. Even though on paper they are the perfect candidate. This is because the score itself is a simple metric provided by credit reference agencies to summarise someone’s financial status. It doesn’t show the entire story that a lender look into.
For example, someone previously bankrupt within the last 5 years, had a credit score of 998 / 1000. However many lenders are unable to assist at all if there has been ANY previous bankruptcy. Therefore they would reject the application regardless of the credit score.
Lenders credit scorecard.
Instead of relying on a single score to grant a mortgage, lenders instead use an internal point scoring system to assess each of the core areas against their lending model. These can include but are not limited to; total amount of credit accounts active, access to debt (when there are numerous active credit cards all with no / low balances), registration on the electoral register, missed or late payment status entries on a credit account, arrears, defaults, CCJ’s, fraud markers, credit utilisation and appetite for debt.
The factors above are then combined with the details of the application such as the amount of deposit, how much is being borrowed and the source of the income in order for the lender to make a decision on whether or not they will be prepared to lend. This will determine if their internal scorecard is a decline or an accept. Generally speaking, increasing the deposit amount will lower the benchmark result required. So if facing a decline based on a credit scoring issue, ask your lender or broker if increasing the deposit would help.
What to do when a mortgage decline is based on a credit issue?
The first action you should take will be to download a free copy of your personal credit file. Mortgage lenders tend to use two main credit reference agencies when they run their checks. These are Experian and Equifax.
Both of these firms can provide you with a full, 10+ page, copy of your detailed credit report. They both offer a free trial service to obtain this. When working as a broker, I would advise sticking with one of these main options. Other alternatives are available but often don’t show the kind of detail that will fully help you understand your situation.
Reports will show each active and closed credit file. They also include the balances, payment terms, payment history, any key dates, and the record of repayment. It may also highlight if any accounts have been fraudulently opened in your name. Sometimes the providers may have failed to properly close the account down (mobile phone operators in particular). Checking this report can often highlight important data that people were unaware of. Therefore it is important to do this regularly if possible and not just when applying for a new mortgage. Pass this report to your mortgage broker as they will determine any specific items that may cause issues.
Ask the mortgage lender for guidance.
Secondly, ask the lender what the reason for the mortgage decline was. Mortgage underwriters can sometimes provide a little more information behind the reason for the decline. However, responses will offer only limited information. Often they aren’t privy to the information used in the decision making process. Especially if it was a scorecard fail on their internal system. However, they can sometimes highlight a particular issue and could discuss a way to move forward. Especially if the issue caused a marginal decline.
Check the dates of any missed payments / defaults. Lenders can often accept mortgages where there have been missed, late or defaulted payments in the past. The two key factors to consider are the amount, and the date. Some lenders require 6 or 12 months since the most recent late payment was noted on the file. In these cases applying a few days before 6 months have passed will trigger an automatic mortgage decline.
However, waiting for 6 months and 1 day, can magically convert this into an accept. Likewise, some lenders can ignore defaulted accounts that are below a certain amount. Such as £250 – £500. So in these cases, reference the date against the lenders criteria to see if an application is worth considering. If not there will almost always be another lender who can help. Again, use a good broker to do this work for you if in doubt.
Undisclosed credit commitments.
Many mortgage decline decisions are caused by the lender discovering credit commitments that have not been disclosed on the application. These may therefore affect the mortgage amount they may be willing to lend.
The lenders will find everything so please remember to include all of the following when submitting your application.
- Credit cards / store cards – include the balance and monthly repayment. Be sure to include those that are active but have a zero balance.
- Personal loans – include the current balance and monthly repayment along with the remaining term.
- Hire purchase agreements, car finance, buy now pay later – Include the balances and monthly repayments along with the remaining term.
- Overdrafts – Some lenders want to know the maximum amount a current account is overdrawn by. Often within the last 3 months.
- Catalogue accounts or Paypal credit etc.
- Small credit accounts for Sofa’s, household purchases etc.
It is important to ensure that your data is keyed accurately on the mortgage application. If the lenders find something during their credit check that does not roughly match your keyed data, they may assume this is a separate credit account and effectively take it into account twice. For example, you may have car finance agreement with Volvo, but funding is actually provided by Black Horse or another financial institution. If you were to declare that you have a £200 per month agreement with Volvo, the lender would only see £200 going to Black Horse etc and therefore will take into account an additional £200 payment each month as they assume that Volvo are also receiving a payment.
Debt to income ratio.
This is a way in which lenders assess risk and creditworthiness when considering a loan. To start with they will total your debt payments over the year / month. Secondly, they will divide this figure by your gross income, usually using your gross annual salary. The final figure provided will be a percentage ratio of your debt levels compared to your income.
For example. If you earn £30,000 each year before tax, but have £6,000 in total annual debt repayments, the ratio will be; £6,000 divided by £30,000 = 0.2 (or 20% when worked as a percentage).
Each lender has their own definition of what they deem to be a good or bad ratio. They will also look at how much potential credit is available to the applicants. This is credit that could be used after the mortgage has started. Typically around 35% or less is pretty good. Above 40% is where things may get a little tricky with some.
Improve your debt to income ratio by keeping monthly commitments as low as possible. Close any credit accounts with zero balance that you do not intend to use. Also consider if the option to consolidate lots of smaller monthly commitments into a single lower figure may be beneficial.
Unsatisfactory property valuation assessment.
The mortgage lender will want to ensure that the property you are buying is suitable for the security of its loan. To do this they will have the property valued / assessed using a basic property inspection. This is entirely for the benefit of the mortgage lender. Basic valuations are often included free of charge as part of your mortgage product. If not there may be a small fee of around £200 – £300. Provided that the property isn’t too high in value.
A valuation report will be carried out by a surveyor who is appointed by the lender via their preferred panel. They will normally visit the property in person. However in some cases they may opt to carry out the survey remotely or via a drive by.
Each lender will issue the surveyor instructions to follow. These highlight any areas of concern that could cause the lenders criteria to not be met. This could be anything, but the common criteria restrictions relate to the property being in a habitable condition, that utility services are being provided to the property, and that it is watertight. A kitchen and bathroom should usually be fitted as well.
Some of the more specific issues they are looking for include, they materials used in construction, how close the property is to commercial buildings, access to the property, any obvious and major structural problems, proximity of large trees, damp. Some of these issues may lead to further more specialist reports being requested by the lender before they can continue with the application process.
For flats they will be considering the total number of floors in the block, the construction / cladding material, access arrangements i.e. lifts etc, the length of time remaining on the lease, the general building condition and whether or not the flats are above commercial units.
Once the report has been completed, it will include a summary of the findings for the lender. It will also note any recommendations for additional reports to be obtained such as a damp or tree report etc. Also included will be a property valuation in its current condition. A valuation figure may also be provided once any remedial works have been carried out. There will also be a figure for the minimum amount the property should be insured for.
If the valuation matches that declared on the application then everything can proceed, assuming there are no other issues.
Down-valuations.
If the surveyor believes the valuation figure on the application form is inaccurate, they may down-value the property. If the property is being purchased, the buyers could request that the sellers reduce their asking price. This is a good outcome if agreed as it avoids anyone potentially overpaying. However, in a lot of cases the seller will not budge and often the deal can collapse.
Alternatively the lender may allow the purchase to continue in light of the down valuation, however, the buyers may need to increase their deposit to do so.
For example. Assume a house is on the market at £300,000 but was down-valued to £270,000. The sellers will not waver from their £300,000 price and the buyers really want this house.
Originally the buyers were going to put in a deposit of 10% (£30,000) meaning that their mortgage would have been £270,000. Now that the property has been down valued to £270,000 they still need to put in a 10% deposit but this will be on the reduced value. So £27,000 is required for the lender to continue and the mortgage amount will be £243,000. Sound good? Remember the sellers still want £300,000 and the buyers are only being granted a mortgage of £243,000, so they will need to increase their total deposit to £57,000 to keep all parties happy.
Valuations can be appealed if there is enough evidence of similar property locally being sold within the last 6 months. However it can be difficult to overturn a valuation decision based purely on the valuation figure if the difference is less than 10% of the valuation keyed on the application form, or agreed with the seller.
Retentions.
A retention is where a surveyor reduces the value of the property temporarily until remedial work has been undertaken. They will provide a value based on the current condition of the property, and another one assuming all recommendations have been carried out satisfactorily.
In its simple form this may could be due to something happening to the property at the time of inspection. If a property is being renovated and the kitchen is in boxes on the floor instead of being installed and working, the surveyor may choose to apply a retention of say £20,000 until the kitchen has been completely fitted. Once the work has been completed, the surveyor can re-assess to verify that everything is now in order and inform the lender that the retention has been lifted.
I have seen a £600,000 house valued at Zero because of a £600,000 retention applied. This was because a kitchen had not been installed on their visit. However, a photograph of the fully completed kitchen sent to the surveyor a week later meant that the retention could be lifted.
However, it can get more complicated, especially when a house is being purchased, and the seller will have to foot the bill for the work before the sale can progress. For example, it could be that double glazed windows have been installed in a grade II listed house, and that they need to be replaced with the original spec design before the lender will proceed. Or perhaps a house is suffering from subsidence because of poor foundations and the lender will not proceed until the house has been professionally underpinned. In these cases it is common to see partial and full retentions.
Both buyers and sellers can work together to overcome retentions. Occasionally the cost of work can be split. However it is in the sellers interest to be flexible. As the same issues are likely to crop up in the future, they may not be able to sell the property regardless
What happens if a lender refuses to lend at all based on the valuation report.
In some cases the lender will refuse to grant a mortgage on the property at all as it may not fit within their criteria. If this happens you can appeal, or switch to another lender. As each lender have their own instructions to the surveyor, a second provider may accept a property that is rejected by another. Once you know the reason for the decline decision you can then approach the new lender and ask them to consider the raised issues in advance. This will save you time and money, although the mortgage deal on offer may not be quite as good as your original number 1 choice.
There will of course be some property that is simply un-mortgageable and these will be purchased by cash buyers. It is worth remembering that if you and a seller have to jump through serious hoops when completing a sale, the chances are you will have the same issues when you come to sell it if not worse.
Income not acceptable.
Income comes in many forms and not every type of income can be used to support a mortgage application. Money received in cash, from overseas in a foreign currency or for short term temporary employment can all prove a stumbling block with the majority of lenders.
Ideally they are looking for simplicity and stability. So this means paid regularly into a UK bank account with official computer generated payslips and bank statements as evidence. Hand written payslips are ok in some instances but will need additional documentation to back them up such as an employment contract and/or work reference.
Even then there are some types of income that cannot be used to support a mortgage in part or full. Irregular overtime, varying bonus payments, ad hoc payments etc can be used in some cases but only a portion will be used as sustainable income.
Self employed applicants can use their percentage share of net profit, dividends and /or salary. However, be careful as to which lenders accept which combination of these. Not all three sources can be used at the same time. There can be a huge difference in borrowing potential by sourcing a lender who use certain combinations of self employed income. I have recently found one lender will offer a mortgage of over £500,000, whereas others would only lend £150,000 using the same set of accounts.
Lenders will also look at trends for those who are self employed. A gradually increasing trend is good and they will tend to average the income over 2-3 years in most cases. They can decline if there are large jumps in income from one year to another. Plus if the trend is downwards they will be concerned about the health of the business, or concentrate on the lowest earning year out of the last 3.
So although you may feel that a source of income is acceptable, always check with the lenders criteria or a broker to see exactly what is admissible to a lender for consideration. Again each lender is different so a decline with one is not the end of the road for the others.
Application does not meet the lending criteria.
This is a broad topic as criteria requirements are vast and varying over hundreds of lenders. Getting a grip on each nuance, loophole and every rule takes a real specialist so find a good broker if you are in doubt. The enforcers of the lenders criteria are the application underwriters. These staff decide whether a mortgage will be a good risk for the bank or not.
If you have any doubts about certain aspects of your application, always try to speak to an pre-sales underwriter before submitting an application. They will be able to cover off any questions and let you know if you stand a good chance of success. Accessing an underwriter is easiest using a broker as they have a direct line in most cases.
It is always possible to challenge an underwriting decision if you feel that it is incorrect. Many times have cases been resurrected when all looked lost. Underwriters are humans and they can get out of bed on the wrong side like all of us. Treat them with respect and you will receive a decent and honest service.
Occasionally though you will come across a solid brick wall. Lenders can refuse a mortgage for any reason even if all the boxes are ticked. They can use the terms ‘outside of policy’ or ‘no appetite for this type of lending’ when they really don’t want to proceed. If this happens don’t expect any more detail or explanation, and start to look elsewhere. If you are lucky they may offer to refund any fees paid.
Application keying errors.
This may seem like common sense but it is amazing how many applications go wrong because of keying errors. Spelling mistakes and number errors can cost time and money. Important information such as missing out middle names, incorrect dates of birth, or the wrong addresses can cause an application to be thrown out. Not only that but they can sometimes progress to the formal mortgage offer, only for the solicitor to report a discrepancy further down the line that can prove catastrophic when the offer is withdrawn.
Double check everything before submitting it. Even brokers are not immune to the odd mistake so check a copy of the application form once everything is up and running and inform them of any errors ASAP.
Multiple / overseas addresses.
Some lenders can refuse to lend or accept a decision in principle if you have too many addresses within the last 3 years. Their credit scoring systems can often only handle 3-4 addresses at a time meaning that you may receive an incorrect decision. Likewise it is difficult to build up a strong credit file if there isn’t much time spent at each address so these can cause other issues.
Addresses overseas within the last 3 years can cause issues also with some lenders insisting on longer periods spent resident in the UK. Again this is because it leaves holes in their credit referencing as it wont bring through info from overseas.
Generic mortgage decline.
Sometimes a mortgage decline can be caused by a snowballing of several smaller issues that on their own would not be a problem. This is because it makes the underwriters job difficult to assess the overall lending risk in a simple manner. Examples of this could be if an applicant is borrowing a large sum of money, the deposit is coming from a source other than their own savings, they currently live at their parents house with few outgoings but rely heavily on their overdraft and they have only been in their job for a short period.
None of these elements in their own right are an issue. However, when combined they paint a picture that it may not be sustainable for someone to commit to a large monthly mortgage repayment when they already show signs of financial distress when their outgoings are low. The deposit has not been saved by the applicants and the short time in a job may indicate that there is some kind of probation period in place or that they don’t have a recent track record of stable earned income.
There will always be mitigating factors for the underwriter to consider and a good broker should be able to appease the lenders concerns in a way that may overturn the decision. However, if not the best thing to do will be to look at each issue in isolation and remedy any that can be easily fixed. So using the example above, the easiest way to push ahead would be to ensure that the overdraft is not used for a period of 3 months if possible. This would then show a period of positive balances.
By waiting around 3 months this will also clear most probation periods and there should be 3 consistent payslips to show the lender. Generally speaking, lenders want to see 3 months of payslips and bank statements so the better these look the greater the chance of success.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this remortgage guide is purely for information purposes only and does not constitute advice.
