Many people experience financial difficulties at one time or another for a variety of reasons. Being short of cash can result in falling behind with bills – perhaps leading to CCJs, missing credit card or bank loan payments or even bankruptcy. Even if the problems are short-lived they can still tarnish your credit record and result in your being turned down for a mortgage.
Although there are no precise figures, it is estimated that about one in five people is initially turned down for a mortgage from a high-street lender. This is often due to misunderstandings and, luckily, the issues can often be resolved. But even after this, around one in nine people still fail to secure a mainstream mortgage and have to go to a specialist lender.
Why you get turned down
There are a number of reasons why people are turned down for mortgages. Sometimes it is simply a case of not filling in the application form correctly. For example, applicants may put down the wrong salary details, perhaps including bonus and overtime payments which are not guaranteed by their employer.
Applications can also be turned down if information cannot be confirmed. For example, a former landlord may not bother to confirm that you paid your rent regularly.
Another common reason for being refused a mortgage is failure to score enough credit points. When you apply for a mortgage, the lender will ask a credit agency to run a check on you. You are awarded points if you have had the same address, job and bank account for a long time. People who pay their bills on time and keep up the repayments on credit cards and loans also can expect to score well. But you lose points if you have defaulted on debts, fallen behind with bills, been issued with CCJs, or been made bankrupt.
What to do if it happens to you
If you are turned down for a mortgage, the first thing to do is to find out why. If you have failed a credit-scoring test, your lender may not tell you why but it will tell you which agency turned you down. Contact the agency. It could be there are mistakes in your record that can be corrected, leaving your credit history unblemished. If this is the case, make sure you contact the other major agencies to clear your record with them. There are three major credit reference agencies: Equifax, Experian and Call Credit.
Another reason why you may be turned down by a credit agency is that you simply have not built up enough of a credit history, says Ray Boulger, senior technical manager of independent mortgage advisers John Charcol.
We often find ourselves in the bizarre situation of encouraging people to borrow to build up a credit score, he says.
Boulger suggests taking out two fee-free credit cards, making purchases on them and paying off the bill each month so you do not incur any costs. By doing this you can build-up some plus points on your credit record.
People who have had the same home address for some time also score well. So young people who have been away at university and have had several temporary addresses should put their home address on a mortgage application form as that will have been their main address for the past 21 years. Similarly, if you have more than one bank account, list the one you have had longest as this demonstrates a long-term relationship with the bank.
If you regularly go overdrawn, don’t assume this will go against you. As long as the overdraft is authorised, it shows your bank is satisfied you can repay the debt.
Cures for serious problems
If standard lenders still turn you down, then you need to look at the so-called sub-prime, non-conforming, credit-repair or adverse-credit lending market. These lenders offer a whole raft of deals to people who have anything from a small £250 CCJ that was settled more than a year ago right through to people who have been made bankrupt, have several CCJs outstanding and owe thousands of pounds.
The number of deals available is vast and so is the pricing so it is essential to get the right product or you could find yourself paying too much. As a rule of thumb, the worse your credit history, the higher the interest you pay. Many lenders will offer a basic product, which is then loaded depending on how poor your credit history is, says Robert Clifford of mortgage broker mortgageforce.co.uk.
The price of the product and the lending criteria changes depending on circumstances.
So rates are a bit more expensive if you have more than one CCJ. The more CCjs and the higher their value, the more expensive the mortgage product will be.
There are around 1,200 deals alone for people with CCJs, so it is essential to speak to a broker if you want to be sure of getting the best deal, he says.
If your credit history is not too bad, an independent broker will also first check to see if a standard lender will consider you for one of its mainstream deals. If you have had only small CCJs, lenders such as Abbey can be flexible. But if you visit a broker that specialises in adverse-credit mortgages they may not deal in the standard mortgage market.
Many of the lenders in this market are not household names. Several are owned by large US banks, such as Southern Pacific (SPML), Preferred and Future, while others are owned by UK high-street lenders. For example, Amber is owned by Skipton Building Society, Accord by Yorkshire Building Society, The Mortgage Works is owned by Portman, which is being taken over by Nationwide, and BM Solutions is part of HBOS, which also owns Halifax. Some mainstream lenders offer adverse-credit mortgages under their own brands such as Chelsea Building Society and Norwich & Peterborough Building Society.
The mortgage deals
Generally, the more adverse your credit history, the higher the interest will be on the mortgage deal. If you have a light adverse-credit history you may well find a deal that costs less than the standard variable rate charged by a mainstream lender. For example, if you have had only one CCJ and it was for less than £1,000, SPML offers a mortgage deal of 4.24 per cent fixed rate until March 2008. Accord offers a three-year fix of 4.7 per cent for those with a CCJ under £500, which can be outstanding, and one month’s arrears is also acceptable.
At the other end of the spectrum, Mortgages plc offers a one-year deal at 12.15 per cent for those with unlimited CCJs and arrears, while Platform’s 7.95 per cent fixed-rate deal is fixed until 1/3/09 for those with unlimited CCJs and arrears.
While rates may be high, for many people these deals may be the only way of getting a mortgage. If you have a light adverse-credit history then, as long as you keep up your mortgage repayments, you may well be able to switch to a mainstream deal after one or two years.
For those with heavy adverse-credit histories this may take three years. For this reason it is best to avoid deals which tie you in for long periods of time.
Arrangement fees are similar to those for standard deals and while you cannot get 100 per cent LTVs, you can usually get up to 90 per cent and in some cases even 95 per cent.
Lenders use similar lending criteria when deciding on the maximum loan size. However, the highest income multiples of five times salary are not available.
Where the amount lent is based on affordability, borrowers may find that the higher interest rates on adverse-credit mortgages reduce the amount they can borrow. It may be worth considering an interest-only mortgage to increase the amount you can borrow and keep the risks of going into arrears to a minimum, says Boulger.
Sub-prime mortgages cost more, so it may be worth going interest-only for the period of the deal to reduce the risk of not being able to afford the mortgage and going into arrears. At the end of the deal you could then switch to a standard mortgage, which will be cheaper so you should be able to afford it on a repayment basis. In the meantime, provided your lender allows
it and you have the spare cash to do it, you could make overpayments on your mortgage to help reduce the capital owed, he says.
When the deal comes to an end, assuming you have a good repayment record, you should look to move to a standard mortgage deal which will probably mean moving to a high-street lender. With any luck you will be back on track with your adverse-credit history firmly behind you.
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