New mortgage rules and what to watch out for

Key mortgage issues to consider

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Here is our list of potential hurdles when applying for a mortgage or re-mortgage. The list is designed to give you a heads up as to where there may be an issue with your mortgage application.

Listed below are a number of areas which course particular concern with mortgage applications.

Please note that the help of an experienced independent mortgage adviser can, in the majority of cases, enable you to navigate these difficulties.

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Adverse credit

Any blemishes on your credit file can cause a problem with a lender. This is why it is in your interest to check your credit file in the first instance (which you can obtain from Equifax, Experian, or Call Credit).

Dealing with adverse credit is a complex issue which is best managed by an independent mortgage broker, but here are some general guidelines.

A one-off missed payment is often acceptable to the right mainstream lender without recourse to a specialist lender. Defaults and County Court judgements can be more of a problem, particularly if these were registered within the last three years.

Those with Defaults and County Court judgements on their credit file should not expect to obtain mortgages at 90% loan to value or above.

Affordability

Since the Mortgage Market Review mortgage lenders have been obliged by the regulator to take particular care when assessing affordability for a residential mortgage.
This means that lenders will now consider not just household income but also household outgoings. As a result, the days of simple income multiples are long gone.

Each lender has its own way of calculating affordability, and many of them offer an online affordability calculator on their website. We as mortgage brokers recommend that clients do not use these calculators as they are only close to accurate if the information is inputted correctly.

Without experience with the lender, and a clear understanding of what they expect in each input box, you are unlikely to get a reliable result.
Any spouse or child can be considered a dependent and this impacts on your affordability. Therefore a single applicant on a single income is likely to have greater borrowing potential than married applicants on the same level of single income.

Ages and terms

The typical maximum term with a mortgage lender is 35 years, but that is subject to the borrowers age at the end of the term.

Lenders will typically not have a problem with a borrower who is under age 67 at the end of their mortgage term. Some will set a limit of age 65. Should you need to take your lending beyond age 67, there are lenders that will work with ages up to 75.

Please note that, often. when a lender is offering a term beyond state retirement age, they will ask for proof of income in retirement and underwrite affordability based on that income.

Bankrupts

Mortgage lenders have a particular problem with applicants who have been bankrupt. Nearly all mainstream lenders will not consider a bankrupt applicant until they are six years from discharge. Some will not consider an ex-bankrupt at all.
Do not be tempted to avoid disclosing your bankruptcy to your lender as your solicitor will pick it up as part of the legal process and advise the lender in any case.

Builders gifted deposit

Where you are buying a new build property and the builder is gifting a sum towards the deposit, you need to be aware that this is not acceptable to all lenders.

Buy to let – benefit tenants

If you are buying a property to let with the intention of letting it to tenants on benefits, please note that there are only a handful of lenders on the market that will consider the case.

Buy to let – non-householder

If you are seeking to acquire a buy to let property but do not own your own home you will find this difficult as there are very few lenders will consider buy to let mortgages for non-householders.
This is because lenders seek to avoid applications where the applicant states they are buying to let but intending instead to live in the property – this is of course mortgage fraud.

Buy to let – minimum income

Whilst buy to let mortgages are underwritten in most cases against the potential rental income, lenders will look for the applicant to have a minimum level of personal earned income.
This is typically £25,000 and can be a problem for some applicants.

Buying from family undervalue

If you have a direct family member (sibling, parent, grandparent) who wishes to sell your property at below market value you can use the difference between the market value and purchase price as your deposit. (If you have a poor credit record you may be asked to contribute at least 5% of your own funds deposit.)

In such a scenario you need to select your lender carefully as this is not acceptable to all mortgage lenders.

Particular complications arise where the original owner intends to continue to stay in the property with you.

Credit referencing agencies

There are three main credit referencing agencies in the UK – Equifax, Experian, and Call Credit.

Different lenders use different agencies to assess an applicant’s credit status, and some lenders use more than one agency. It is therefore useful to have copies of all three credit files to check there are no issues listed.

Most of the larger lenders run what is known as a ‘Credit Score’. This is nothing to do with the figure shown at the head of your credit agency report, but is a number calculated by the lender’s computer system to assess your suitability for lending. Each lender has its own way of marking credit score and typical factors considered are:

  • loan to value
  • income
  • outgoings
  • dependents
  • credit history
  • time in employment
  • type of employment
  • source of deposit

Where a more flexible approach is required, there are lenders available that do not make decisions based on automatic credit score.

Family gifted deposit

If part of your deposit is coming from a gift from a close family member, this should not be a problem with most mortgage lenders. The lender however will require a gifted deposit letter set out in a prescribed format and signed by the Donor.

Flats

There are a number of potential complications when arranging a mortgage for a flat or apartment.

High-level building – most lenders will not accept buildings above six stories
Studio flats -many lenders will not consider flats the do not have a defined bedroom

Flats above shops – a straight decline for many lenders, particularly if the flat is above or adjacent to:

  • clubs
  • pubs
  • restaurants
  • take aways
  • dry cleaners

Help to buy

Help to buy mortgages are not offered by all lenders. In particular, if you are considering the help to buy equity loan scheme, there are only about half a dozen lenders that will consider the case.
Help to buy mortgage guarantee scheme mortgages have a wider choice of lenders. The mortgage guarantee scheme enables more lenders to offer attractive products with less than 15% deposit.

Interest only

Interest only residential mortgages are now almost impossible to obtain. There are some small pockets of lending available on the market for interest only but only on high-value properties where there is a considerable amount of equity.
Borrowers who have an existing interest only arrangements can ordinarily continue with their current lender in the same way.

Job change

If you are changing jobs just before or during your mortgage application process this can be a problem. Some lenders will not advance lending whilst you are in a probationary period, others will want to see one or three month’s payslips in the new role before they will release funds.

Let to buy

If your intention is to let your current home as part of the process when buying a new home – this is known as let to buy.
It is an arrangement fraught with difficulty with regard to mortgage lending as these cases can regularly fall down on affordability.

Maternity leave

Applicants on maternity leave need to be very careful with the lender approached. The most common policy is that the lender will work on your return to work income if your employer confirms in writing when you intend to return to work and your income at that point.

Some lenders will not advance funds outside of three months before your return to work.

Self-employed applicants that have seen a drop in a particular year’s trading due to maternity leave may have particular complications.

Minimum property values

Lenders will have a minimum value of property on which they will lend. If you buy a property for under £100,000 this is something you need to consider.

Mortgage arrears

If you have missed mortgage payments showing on your credit file it can be particularly difficult to arrange a new mortgage or re-mortgage. Where payments are up-to-date and missed payments are over the 12 months old there will usually be lending options available.

New build property – loan to value

When you are buying a new build property you should be aware that lenders limit the loan to value on such cases.
For example a lender may offer 90% mortgages (10% deposit) but only 80% on a newly built house, or 75% on a newly built flat.

Obtaining over 75% loan to value on a new flat, or 85% on a new house is particularly tricky.

Second homes

There are a number of lenders that will consider second homes subject to affordability and loan to value limits. (A second home being a property you intend to retain for family use and not to let out)

Self-employed mortgage applications

Applications for self-employed applicants are particularly difficult to handle as every lender has a different policy on how income is considered.

Lenders are interested in profit not turnover and will usually average figures over two or three years. Some lenders will work off of your most recent year’s figures only but this is extremely rare.

Company directors should note that where they own over 50% of the business there are lenders that will consider the business profit rather than just PAYE and dividend.

Spouse not on mortgage

Sometimes applicants have a particular reason for not putting their spouse on a mortgage application. This is a particular problem with adverse credit lenders but is normally acceptable with mainstream lenders.

Vendor’s gifted deposit

Where a property owner is looking to sell to you for under market value you cannot consider the difference between purchase price and the value as your deposit – this is not acceptable to lenders.
If you have been renting a property for over 12 months and buying from your landlord there may be lending options available.

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