It's harder to get a mortgage than it was a few years ago. The credit crisis has led to the Financial Services Authority (FSA) making significant changes to the way that banks lend us money. Several of the leading financial institutions have been heavily fined. For example, in 2011 DB Mortgages was fined £840,000 and Kensington Mortgage Company Limited £1.225 million for irresponsible lending and the unfair treatment of customers who were in arrears.
Difficulty Getting a UK Mortgage
The Council of Mortgage Lenders (CML) estimate that 45,000 homes could be repossessed in 2012. Given the affordability issues that have plagued borrowers in recent years, it's now an FSA requirement that lenders carefully assess whether a customer can afford to buy a home. In other words, do you have enough money to make the monthly repayments? The lender, not your mortgage broker, will now assess whether property ownership or refinancing is realistic for you.
A Daily Mail article by Kirsty Walker on 19 December 2011 stated that: "Up to a million borrowers could be turned down for mortgages under a tough new crackdown on lending." You can no longer self-certify your earnings. Although this makes life more difficult for the self employed, it prevents families from running into financial difficulty at a later date. Also, interest-only mortgages can no longer be taken out without a suitable repayment vehicle. Checking a box will no longer suffice, you'll need to provide evidence with regard to how you'll repay the principal.
What is Required to Get a Mortgage?
Credit history: The way you've handled your credit obligations has rarely been more important. If you've failed to repay your debts, it increases the probability of an outright decline. At the very least, it'll restrict the number of potential mortgages and dramatically increase the cost of borrowing. If you do have bad credit, it's advisable to select a bank that specialises in assisting people with a poor credit rating. You should also refinance as soon as your credit rating starts to get better and you're able to do so without incurring an early redemption penalty.
Down payment: Unless you have a guarantor, you won't be able to get an 100% mortgage. There are still 5% mortgage deals available, but they'll cost you extra. House deposits are important to the lender because it helps a homeowner avoid falling into negative equity. If you subsequently default, it's hard for a bank to recover the money that they've lent you. If you can keep your Loan-to-Value (LTV) to 75% or less, it's easier to get approval. If you do have an adverse credit history, this will be essential.
Affordability: The classic income multiple for a single applicant is 3 and 2.5 for joint applicants. For example, if you earn £40,000 per annum, you can borrow £120,000. However, the lender will now scrutinise your outgoings to make sure that you can afford to make the repayments. The more money that you have left, after deducting your household expenses, the more likely you are to be approved. You may be able to borrow more than this figure if you have sufficient disposable income.
Employment: Buying a house is a long term financial commitment, so you're going to need to a full-time job. Temporary work won't get your application approved. If you're still in your probationary period, you should wait until this has been satisfied before applying. If you have a professional job, your application will be particularly well received. Certain careers, such as being a doctor or pharmacist, are not only well paid, they have significantly better job security.
What is required to get a mortgage? In reality, not a lot has changed, you just can't conceal key facts about whether you can afford the repayments. You can no longer make a decision that has a high probability of being detrimental to your family. Many homeowners got into financial difficulty because they were never able to afford the repayments. Others started credit agreements that lasted well into their retirement. Sometimes you just have to accept that it isn't in your best interests to buy a home. If you disagree, ask someone who has had their home repossessed how it affected their life.
Sources:
- "FSA fines DB Mortgages for irresponsible lending and poor treatment of customers in arrears" Financial Services Authority (FSA).
- "Kensington Mortgage Company Limited fined £1.225 million for unfair treatment of some customers in arrears and will pay estimated £1.066 million customer redress" Financial Services Authority (FSA).
- Walker, Kirsty. (19 Dec, 2011). "A million to miss out on a mortgage in new lending crackdown." Daily Mail.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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