Though the pandemic has taken a toll on the economy, the housing market has never been more robust. Nevertheless, since home prices have now risen to their highest level in seven years, buyers cannot afford any mistakes in their mortgage applications. These are the hidden pitfalls to be aware of. An article by Best Bizz.
People were expecting that house prices would fall or at least stagnate during the pandemic. Many first-time buyers were, in fact, wistfully hoping that the trend would continue. However, the government didn’t want another property crash on top of everything else, so they introduced the stamp duty holiday to boost the market and furlough schemes to protect many people’s incomes. As a result, house prices are increasing at their fastest pace in seven years, with no signs of slowing down. In the next four years, Capital Economics property economist Andrew Wishart predicts further price growth of 17%. In other words, house prices are now rising faster than most people can save.
Right now, prospective buyers are better off trying to cut their losses by getting on the property ladder as soon as possible, rather than waiting for prices to fall. The right advice has always made this easier than many think, but with the right information, it’s now more achievable than ever before. As mortgage rates remain at historic lows, the government’s new 95% mortgage guarantee scheme will be a great help to many people.
It is these little slip-ups that can pose the greatest risks to a deadly mortgage sins to avoid application. Mortgage lenders may become concerned by a number of minor factors that seem inconsequential. If you are aware of these in advance, you can avoid having your mortgage offer rejected at the last minute due to last-minute snags.
1. How to avoid the Help to Buy ISA deposit trap
If you’ve used a Help to Buy ISA to save up your deposit, you may run into an issue that has caught some buyers off guard. When you purchase your first home with the Help to Buy ISA, you will receive a 25% bonus. However, the bonus is only paid after the sale is completed. As a result, you are unable to use this money directly as part of your exchange deposit but have to find the extra money somewhere else. Taking out a short-term loan should suffice since you can pay it back with the bonus after the purchase has been completed.
2. Your credit report contains ‘white noise’
While your credit record may be solid, any irregularities can still damage it – and even if they don’t stop your application, they can delay it so that you lose the property you want. Common problems include:
- In recent months, there have been large one-time payments
- Made to others through gifts or loans
- Donations or loans from others (the lender may worry that you are financially dependent on someone else)
- Payments misnamed (don’t use joke references for money transfers – specify exactly what they’re for).
- Orders not processed.
- Several credit cards (even unused ones), or store cards you may have forgotten about
- Financial links with other people (e.g. shared credit cards with ex-partners)
- Transactions involving gambling – can make lenders nervous. In preparation for a deadly mortgage sins to avoid application, it’s best to kick any gambling habit, no matter how minor.
Receiving money from someone can hurt your credit rating. This might seem strange to you. When you have received gifts to pay for your deposit, make it clear that they are gifts and keep a paper trail to prove it. Providing you can prove they are gifts, you should be fine as long as you prove they are not loans.
3. Deposits for gifts
However, lenders have even started to look askance at buyers whose deposits were gifted to them by others. When Nationwide announced in August 2020 that it would reject applications for 90% deadly mortgage sins to avoid where the buyer’s parents provided more than 25% of the deposit, there was a minor outcry. The lender reversed course in November, allowing parents to provide more (up to the full deposit).
Lenders, however, generally take a more cautious approach when gifted deposits come from someone other than parents, like distant relatives or good friends. Due to the higher probability of the ‘gift’ being a disguised loan, they may ask for additional proof that the money really is yours. As this may cause another delay, be ready to respond as soon as possible if you have any questions.
In general, it’s a good idea to keep all the paperwork relating to your deposit, even if you just saved it up yourself. That way, there is no uncertainty on the lender’s part.
4. Fail the affordability test
First-time applicants typically focus only on their borrowing power – you can borrow up to four and a half times your dependable income. One factor that is often overlooked, and more difficult to calculate, is whether mortgage payments are affordable. Lenders want to make sure you can afford the monthly deadly mortgage sins to avoid payments, and the size of these will depend on a range of factors, including:
- What you’ve borrowed
- plus the interest rate
- based on your mortgage type (for example, fixed, tracker)
When determining the maximum you can afford, take this into consideration. Generally, a loan with a high loan-to-value (LTV) will have higher interest rates than one with a lower LTV, which in turn will have higher rates than one with an 85% loan, and so on. Thus, the largest loan you can borrow may be bigger than the largest you can afford to repay (remembering that lenders prefer a comfortable safety margin). Alternatively, you can prove you can afford those repayments by borrowing slightly less than the maximum. Adopt a personal austerity program, cut back on spending as much as you can in the months before you apply, and show your lender that you have the safety margin they need.
5. Recording your income: common mistakes
Even though this is a silly mistake, it is surprising how often it occurs. Make sure you give an exact number based on your P60, not off the top of your head. It is common to forget to include pay increases. Tell the lender if you use a salary sacrifice program (e.g. for pension contributions), as this can make it seem like you earn less than you do. Include any bonuses and commissions separately so that the lender won’t think you’re trying to deceive them. Be careful not to write in your monthly salary when they are asking for your annual salary.
6. Reorganizing your business or changing jobs
As a result, lenders want you to be well settled in your job, so if you’re still on probation (e.g., in the first six months), it may hurt your application. It is possible for having a higher salary to offset this to some extent, but it is still an issue.
If you’re self-employed and have recently changed your business structure from a sole trader to a limited company, a similar problem may arise. It will appear that the business is a new one (even though it’s the same one with a new hat), and some lenders will insist on a full year’s trading history before offering you a deadly mortgage sins to avoid. If you have already switched lenders, your mortgage broker may be able to help you.
7. Failing to get a mortgage
Even though it may seem frustrating, having one failed mortgage application on your record can make it more difficult for you to succeed next time. When you apply for a mortgage, the lender runs a hard credit check that stays on your file. You could then raise concerns with the next lender, and if you’re not careful, you could get into a downward spiral of rejection.
It is always better to follow the ‘If at first, you don’t succeed’ approach than to do all that you can to achieve success on the first try. If you are unsure how to go about it, contact a mortgage broker to start the process. They will not only search the entire market for the best deal, but they will also thoroughly check your deadly mortgage sins to avoid application and highlight any issues before the lender sees it. As a result, there is a lower chance of rejection – around 80% of mortgage broker applications are approved the first time.
The following seven crucial details can prevent you from missing out on the rising property market by paying close attention to them instead of watching it climb further out of reach.