You’ve found a house you would love to buy but you’re unsure if your debt will affect your mortgage eligibility. There are different types of debt, from student loans to bankruptcy.
We’ve taken a look at them to help you understand how they affect your chances of getting a mortgage.
Your debt isn't the entire picture
Before you look at your debts, consider your income and other expenses. Mortgage lenders look at the big picture. If you can afford to repay your agreed debt payments AND have spare capital, this could improve your chances of getting mortgage approved.
Debt does affect how much you can borrow - there’s no getting around that. However, it helps if you can show affordability for a mortgage by having reduced expenses or a large income with plenty of monthly free capital.
What is classed as a debt for mortgage purposes?
Understanding what mortgage lenders consider a debt will help you to eliminate or reduce the risk of being rejected for a loan. You may need to spend time paying off these debts rather than saving up for your deposit.
Debts can include things like:
- Student loans
- Credit cards (also store cards)
- Car finance
- Mobile phone contracts
- CCJs or IVAs
Lenders also differentiate between ‘good debt’ and ‘bad debt’. ‘Good debt’ consists of low-risk loans, such as student loans or car finance. ‘Bad debt’ is higher-risk or more expensive forms of credit, such as store cards or payday loans.
So, which debts do you have and how will they affect your mortgage application?
If your student loans are from the Student Loans Company, this is a Government-backed financial scheme. The loan repayments are taken from your pre-tax salary each month – so they shouldn’t cause an issue for mortgage lender decisions.
If, however, you took out other loans (e.g. commercial) while you were a student, this could affect your eligibility for a larger mortgage loan. It all depends on how large your student loan was, whether you’ve repaid every monthly payment on time and in full, and how much time is left on the loan term.
Credit cards aren’t always a bad thing - yes, honestly! They can help you build a good credit score, even if you’ve had previously poor credit.
It’s more about how you use them. For instance, if you’re always maxed out and only repay the minimum each month, mortgage lenders won’t look kindly on that. However, if you spend up to around 20% of your total borrowing limit each month, and then pay it off in full, on time, every month; this shows you’re responsible with credit.
Cars are expensive and mortgage providers know that. They’re also fully aware that they’re essential for most people to get to and from work – and without a job, you wouldn’t be able to pay your mortgage!
So, car finance is seen as a fairly ‘good’ debt. It’s a steady debt to have in order to eventually own something at the end. It’s in your interest to pay each monthly payment in full and on time. If you don’t, your car could be taken back. As long as you can afford your monthly car finance payments with ease, a mortgage lender won’t consider this a bad debt.
Mobile phone contracts
Mobile phone contracts are funny things that often catch people out on mortgage applications. Forgotten contracts, one late payment from years back, or sudden price changes all affect your credit rating.
However, overall, the rule is the same: as long as you’re paying your bill on time, in full, and have no defaults, it’s not a serious debt in the eyes of a mortgage lender. If, however, you’ve run up a huge bill or have lots of unpaid phone bills, that’s going to inhibit your chances of getting a mortgage.
CCJs and IVAs
A County Court Judgement (CCJ) or Insolvency Voluntary Agreement will have a serious impact on your ability to get a mortgage.
There are very few lenders who will take someone with a recent CCJ or IVA to their name. Unless you have an exceptionally large deposit, it could be difficult to get a mortgage. It’s not always impossible though. on 01472 802317 to find out more.
A current bankruptcy, and the six years following the declaration, will prevent you from getting a mortgage from almost all lenders.
Don’t panic though. There are a handful of mortgage providers who will take discharged bankrupts from as little as one year after the bankruptcy declaration (although the likelihood of acceptance increases the more time has passed).
A mortgage adviser will have access to unique deals that you may not find if you apply for a mortgage on your own.
How to improve your chances of getting a mortgage despite your debts
The good news is that you can rebuild your credit rating and reduce your chances of getting rejected for a mortgage. Take these steps first:
Check your credit score
Your credit rating is something that all mortgage lenders will consider when you apply for a home loan. Make sure you spot any defaults, potential fraud against your name, or other stumbling blocks by checking your credit score.
Different lenders use different credit score companies to determine your suitability for a mortgage. So make sure you get your free credit report from all three companies:
You should be able to access your report for free.
Don’t miss any repayments
Defaults can take a LONG time to stop affecting your credit report.
Any missed payment, known as defaults, on any line of credit will affect your credit score. Even if you’ve only got £1 on your credit card and you forget to repay it, that’ll look like a late payment or a default.
Avoid applying for credit soon before your mortgage application
Every application for credit knocks your credit score for a little while – and if you’re rejected, that has an even bigger impact on your long-term rating.
Applying for credit a few months before your mortgage application can seem like a red flag to lenders. It looks like you can’t afford to live within your means, and this could make you a higher risk borrower. If you can avoid it, don’t apply for any credit at least six months before your mortgage application.
Identify large events that caused the debt
Mortgage lenders like to know why you’ve got debt. Some debt, like student loans, are easily recognisable. Others, such as one-off payday loans, need more explanation.
Lenders offer loans on a case-by-case basis, not just the maths of your loan-to-income ratio, or whether you have ‘good debt’ or ‘bad debt’. If, for example, you changed jobs and your car broke down before your first new paycheque, that explains why you needed a short-term loan one time.
If, however, your credit and loan history show a pattern of borrowing from several lines of credit and over a longer period of time, this shows your spending habits aren’t caused by one major thing. Lenders are less likely to look favourably on these habits.
Use a professional resource: your mortgage adviser
Nobody knows how to navigate the confusing world of debts and mortgages better than your mortgage adviser.
They’ll offer advice and tips to help you improve your credit score and other factors that may affect your mortgage eligibility. They’ll also let you know if your application is likely to be accepted, or if waiting a few months or a year would be better. A mortgage rejection is a huge blow to your future chances of getting a home loan, so make sure you seek the advice you need and get help with your mortgage application.
Our advisers are happy to help guide you through the process, or head to find out more about getting a mortgage
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.