Receiving a declined mortgage application can feel disheartening, but it’s not the end of the road to homeownership. Many people face setbacks in the mortgage process, and the good news is there are actionable steps you can take to improve your chances next time. In this guide, we’ll walk through the common reasons behind a mortgage decline and outline steps you can take to bounce back and strengthen your application.
1. Understand Why Your Mortgage Was Declined
The first step is to understand why the lender rejected your application. Common reasons for a mortgage decline include a low credit score, high debt-to-income ratio, limited credit history, or inconsistencies in income. Lenders are required to explain why they rejected your application, so take advantage of this information to address any specific issues. If the reason for your decline is unclear, consider contacting the lender for clarification.
2. Check Your Credit Report
One of the top reasons for mortgage rejection is credit issues. Reviewing your credit report can help you identify any problems or errors that may have impacted your application. Use a comprehensive service like Checkmyfile to access your credit report across the main credit agencies (Experian, Equifax, and TransUnion) to get a complete picture. If you notice any errors, contact the credit agency to correct them, as even minor inaccuracies can affect your eligibility for a mortgage.
Key Steps to Improve Your Credit Score:
- Pay Bills on Time: Late or missed payments can lower your score, so make prompt payments a priority.
- Reduce Outstanding Debt: Aim to lower credit card balances and other outstanding loans to improve your debt-to-income ratio.
- Register on the Electoral Roll: Lenders look for stable residence records, and registering to vote is a simple way to improve your score.
3. Assess and Reduce Your Debt-to-Income Ratio
Lenders will often look closely at your debt-to-income (DTI) ratio to ensure you can comfortably afford mortgage payments. If you have significant outstanding debt relative to your income, focus on reducing it. Consider paying down high-interest debts first, like credit cards or personal loans, to reduce your monthly obligations and improve your DTI ratio. Lowering your DTI can enhance your affordability in the eyes of lenders, which is crucial in mortgage approvals.
4. Review Your Employment and Income Documentation
Inconsistent income or employment history can lead to a rejected mortgage application. If you’re self-employed or have variable income, lenders may find it harder to assess your ability to make regular payments. Make sure you have all the necessary documents in order—typically, payslips, bank statements, and, for self-employed individuals, tax returns and accounts. Having reliable documentation showing consistent income will help address any concerns the lender may have.
5. Save for a Larger Deposit
A larger deposit can make a significant difference to lenders, as it lowers the loan-to-value (LTV) ratio and reduces their risk. If possible, aim to save a higher deposit amount before reapplying. For example, moving from a 5% deposit to a 10% deposit can open doors to better rates and improve the likelihood of approval, as lenders may look more favourably at applications with a lower LTV.
6. Consider Using a Mortgage Broker like GoMortgage
A mortgage broker who understands your unique circumstances can guide you to lenders who are more likely to accept your application. Brokers have access to a wide range of lenders, including those specialising in applicants with lower credit scores or complex income situations. They can provide insights and suggest lenders who may be more flexible, increasing your chances of success. A good mortgage broker can also help you present your financial situation in the best light, which can make a real difference.
7. Address Any Self-Employment Challenges
If you’re self-employed, there are specific steps you can take to improve your application. Lenders often look for at least two to three years of consistent income, so if you’re just starting out, it may be beneficial to wait until you have a stable income history. Keep accurate records of all income and expenses, and work with an accountant to ensure your financials are clear and well-presented. Many lenders offer products specifically for self-employed applicants, so ask your broker about these options.
8. Explore Alternative Mortgage Products
Some mortgage products, like guarantor mortgages or joint applications, may provide solutions if you’re struggling to meet standard eligibility criteria. A guarantor mortgage, for instance, involves a family member or friend who agrees to cover payments if you’re unable to do so. Joint applications allow you to apply with another person to combine income, which can improve affordability. However, these products come with their own requirements and considerations, so consult a mortgage broker to understand if these options are suitable for you.
9. Give It Time and Reapply
Sometimes, waiting a few months can significantly improve your chances of mortgage approval. Use the time to address any issues highlighted by the lender, whether it’s improving your credit score, saving for a larger deposit, or increasing income stability. By taking proactive steps to strengthen your financial profile, you can approach your next application with greater confidence.
10. Prepare Thoroughly for Your Next Application
When you’re ready to reapply, ensure all documentation is complete and your finances are in order. Double-check your credit report, gather all necessary income and tax documentation, and have proof of any significant savings. A well-prepared application reduces the chances of any surprises, and a lender is more likely to look favourably on a thorough, organised submission.
Final Thoughts
Facing a declined mortgage application can be discouraging, but it’s also an opportunity to strengthen your financial profile and come back stronger. By understanding the reasons behind the rejection and addressing each one systematically, you can turn this setback into a stepping stone towards homeownership. With patience, preparation, and possibly the guidance of a mortgage broker, you’ll be well-positioned to secure the mortgage you need.
If you need help navigating your mortgage journey, our team is here to provide expert guidance tailored to your unique situation. Reach out to us today for personalised advice on getting your mortgage approved and moving closer to your homeownership goals.
