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What can homebuyers do to pass the stricter mortgage tests?
By Lee Boyce and This Is Money
Published:17:49 EST, 26 April 2014 |Updated:05:56 EST, 11 August 2014
Think of applying for a mortgage as like going for a job interview, you need to sell yourself so the lender knows you will be a reliable borrower.
This is even more important thanks to changes by the financial watchdog’s Mortgage Market Review that have made lenders more stringent when vetting applications and that means you can expect a grilling when it comes to your income and expenses and ability to repay.
The MMR will put the finances of first-time buyers, home movers and even those looking to remortgage under a brighter spotlight. However, the lack of understanding about the new rules may see many turned down for a mortgage.
So if you want to get a mortgage prepare by following our key steps to boost your chances.
Brighter spotlight: New mortgage rules will see lenders probe finances even harder
MMR means lenders have to apply ‘stress tests’ to make sure someone could still afford their mortgage if interest rates went up.
In some cases, this could involve having to prove you would be able to pay a mortgage with a seven per cent rate.
People are likely to be asked for more detail about regular outgoings such as childcare, food, household bills, loans, credit cards, toiletries, hobbies and leisure activities, in order to weigh up whether or not they can afford their home loan.
Many lenders already implemented changes before the April 26 deadline.
The key is preparation – what you can do to pass the test
In order to stand the best chance of securing a mortgage – and to get one with the best interest rate – homebuyers need to get their finances into rude health. However, according to Experian, few potential buyers get prepared.
Checking your credit score would help provide a clear picture of your financial situation and how you are likely to be viewed by lenders.
Peter Turner, managing director of Experian Consumer Services, said: 'Although none of us have the luxury of a crystal ball to see into the future, understanding how much we can really afford to borrow - and crucially, repay - even if our circumstances change, is so important for any credit application.
'Time spent preparing your finances now will pay dividends in the future. We’d advise potential homebuyers to look at their financial situation as soon as they make the decision to look for a home, and not just before they apply for a mortgage.
'This will give you the chance to make any improvements necessary and get accepted - and at the best rates, too.
'Simple steps like increasing your monthly credit card repayments, ensuring you’re registered on the Electoral Roll and not taking on additional borrowing can make a real difference to how lenders see your ability to afford and manage a mortgage. But it does take time to build a clear, consistent track record of positive money management.'
Five steps: We reveal top tips below on how to pass your mortgage stress test
Top five tips for passing stricter tests:
Know your budget: As soon as you decide to look for a property, scrutinise your last few months’ outgoings carefully to understand your spending habits. Are there things you could do without to finish each month with cash in the bank?
A lender wants to see be confident that you have the means to repay a mortgage. They will ask lots of questions about your income and expenditure to decide whether you are worthy borrower and then their underwriters will use their own formulas to determine whether to lend to you and how much.
You can boost your chances by getting your finances in order.
This means making sure you are paying back any debt such as overdrafts, loans or credit cards, so that the lender can see evidence that you can cope with repayments.
Being more organised in your daily and monthly spending will also boost your chances.
You will find that a lender looks at your regular monthly outgoings, such as any childcare, utility bills, mobile bills, car loans that you have.
They will also ask for a list of your expenses, which could range from your weekly food shop to how much you spend on a night out.
This is so they can assess how much you spend and how much you are likely to be able to afford.
It also shows how prudent or frivolous you are, so while you should not lie, you should consider cutting some of these costs and be realistic about what you can afford before applying for your mortgage.
Get all the information to hand when applying and help the wheels run smoothly.
Know what you can really afford: Be realistic about what you can afford before you start your search, There is no point in looking at properties way above your price range if you are unlikely to get or even be able to afford a mortgage on it.
Your repayments should not be more than 35-40 per cent of your net monthly income.
Use our mortgage affordability calculator to work out your likely repayments. Importantly,
play with the interest rate settings to see if you could afford repayments if rates rise by one per cent, two per cent or more.
Make sure your credit report is up to date: As well as checking your outgoings, you should also check your credit report, which includes a record of all your borrowing over the last six years.
When you apply for any form of credit most lenders go through a credit reference agency for information on your financial past.
Credit agencies compile credit histories from a number of sources, including the electoral roll, County Court Judgments and how effectively past debts have been paid to make a decision on whether to lend to you and how much you can afford to repay.
The decision to turn borrowers down for credit isn't made by the credit reference agency but by the lenders, based on their own criteria.
You can check your credit record by paying for a report a credit reference agencies, such as Experian.
This is Money offers a service to check your Experian file through a 30 day-free trial period.
You need to check your report for any discrepancies such as false addresses or incorrect information about repayments. You may also find old accounts you have forgotten to close.
If you find anything that’s wrong get it fixed.
Ensure everything is accurate and up-to-date.
Does your credit score need work? Credit scores help you understand how a lender might score your credit worthiness. If it’s lower than you expected, ask experts for help and ensure your credit report paints the best picture possible before you make your application.
If there is something wrong on your credit file speak to the credit reference agency to get it sorted.
If information such as addresses or names are wrong then you will need to contact the credit agency, explain what is wrong and ask for it to be sorted out. This may require proof that you did not make a transgression or that it was not your fault.
If it is a missed payment that you made, or missed and then made up, speak to the company in question and ask them to amend it.
You can ask to have a note of correction put on your credit file against any black marks. This is a short (200 words maximum) explanatory note you can add to an to explain the background to that information. Anyone searching your report in the future or who has seen it in the previous six months will see the Notice of Correction, and they must take account of it when you apply for credit.
If a lender refuses you credit, it must say why.
All is not lost if your rating is poor - although it may take time to repair. Bankruptcy details remain on people's ratings for up to six years, but for most minor problems it should take a year of good credit habits to return a rating to health.
The work you do in checking your credit file and correcting any mistakes will pay major dividends when it comes to applying for a mortgage.
Build good behaviours: Ideally, you need to be getting a good history of credit well in advance of applying for your mortgage.
Mortgage lenders want you to have built up some debt in the past. This is because they like to see evidence that you have been able to repay it.
Any type of financial contract or debt will be reflected on your credit record and as long as these are manageable and repaid on time it will be good for your credit rating.
If you have a mobile or broadband contract or an overdraft that is always paid on time then it is likely that you are already building up a credit record, but if you have no records you can add to them by taking out a credit card.
You shouldn’t build up debt unnecessarily but you can use credit cards to pay for items and then pay off every month.
As long as they are repaid each month and closed at the end of an offer period you will be showing the lender that you can manage debts effectively and build up a decent credit rating.
Apply for credit you are likely to get. Also, ask lenders in the first place to only do a 'quotation search' - asking for a rate first - rather than a 'credit search' as this will not show up on your report.
An individual application in itself will not be viewed negatively - but repeated applications in a short space of time can make you look desperate for credit. This in turn will make lenders less likely to accept you.
The probe: What lenders may now ask
Below is a list of costs that lenders may ask you about as part of the new rules:
- Do you have children?
- Do you plan to start a family or have more children?
- Do you expect your income to fall in the near future?
- Do you plan to leave your job, start a business or become self-employed?
- Have you ever taken out a payday loan?
- Do you ever gamble?
Category: Home mortgage