Wondering whether or not you can get a mortgage deal when you’ve got loan or credit card debts, is one of the most common concerns amongst home buyers.
Running up credit card debt, or taking out another loan can often seem unavoidable, and you might understandably be worried about approaching lenders if you’ve already borrowed money elsewhere. While it’s true that lenders have tightened their criteria, having debts won’t necessarily stop you from getting a mortgage deal.
While the amount of debt you have will affect how much you can borrow - whether your actual mortgage application gets accepted or not, will always depend on your own individual circumstances.
Different factors affect your application
It’s understandable if you believe that having any debts will stop you from getting approved for a mortgage, but this isn't the case at all. In fact, lenders look at a variety of factors in order to make a decision on your application.
For example, they’ll assess the type of debt you have and the circumstances surrounding it. Your debt-to-income ratio and how it affects your overall financial health will be taken into consideration, which means they’ll look at how much debt you have as a percentage of your income.
The actual level of debt-to-income ratio that will be accepted will vary depending on the lender. Of course, generally speaking, the lower your debt-to-income ratio is, the better.
Good and bad credit
How much you owe will be looked at, but so too will the overall spread of your credit. This means the number and types of credit cards or loans you hold will all be taken into consideration.
This is a good thing, because certain types of loans may be seen as lower risk than others, as far as the banks are concerned. For example, if you’ve taken out a car loan, this may not be looked at as a major issue, especially if you drive every day.
Many lenders will look into you as an individual and your backstory with credit. Rather than looking at you just in terms of the amount you owe, they’ll look into why you ran up debt and what are you doing about it today.
Sudden events can require immediate payment, such as an illness, repairs or renovations. If you can highlight things like this, lenders will often be more favourable with you than if you just over-spent.
Calculating your affordability
Getting a mortgage deal is no longer just about the size of your deposit, your income or credit rating. Mortgage lenders also focus on affordability calculations, to work out how you can afford to meet your payments. Of course your debts come into this; including credit card repayments, bank loans, overdrafts etc.
Your repayments will be looked at as part of your monthly expenses and then weighed up with your income - all to see if you can comfortably afford to meet your potential mortgage repayments.
If you’re buying with a partner, then the majority of lenders will look at their debts and level of income as well.
Things to do to help your approval chances
Having a large deposit can help when it comes to getting lenders to overlook debts, providing you’re keeping on top of the repayments of course. You may be tempted to take out a loan so that you can put down a bigger deposit, but this would definitely be a mistake.
The extra borrowing for the deposit is likely to see you fail the affordability calculations, and this will result in your mortgage application getting rejected completely.
There are other steps you can take to improve your chances of having your mortgage application approved, such as:
- Putting together a plan to pay off your debts before lodging your mortgage application.
- Closing down any of your credit card and loan accounts that haven’t been used.
- Paying off your debts as much as possible to bring down your debt-to-income ratio.
- Building up your credit history with regular payments.
- Being open and honest about any debts you have when applying.
One of the best things you can do to really improve your chances, is to get in touch with our expert mortgage broker team at TaylorMade.
Not only do we know each lender through and through, but we’ll be able to easily assess your overall financial situation - in order to offer tailored advice and point you in the direction of the lenders most likely to say, ‘yes.’