Getting a mortgage is going to be a lot tougher – particularly for people with a less-than-perfect credit history or anyone whose income has previously been self-certified. The money saving expert recently heard the account of a lady who had missed one credit card payment and a council tax payment in the last twelve months. Her mortgage broker was unable to place the new remortgage at 86% loan-to-value. This account would have been unbelievable eighteen months ago!
Two years ago, around 15,000 different mortgages were available. Now, there are only 1,670, with the best deals available only if you have a good credit rating and a large deposit.
The increased regulation of the mortgage market is a result of intervention by the Financial Service Authority (FSA), which wants to crack down on “irresponsible borrowing” as much as “irresponsible lending”.
As a result, mortgage lenders are going to be looking harder than ever at your financial circumstances before even thinking of giving you a mortgage offer.
Prove how much money you earn
The FSA is proposing that self-certified mortgages, where earnings are taken on trust, should be outlawed. As these comprised 49 per cent of all mortgages at the peak of the housing boom, a large swathe of mortgages will completely disappear.
If you are one of the two million Brits who are self-employed or freelance, you are now going to have to arm yourself with proof that you really do earn what you claim. So keep copies of your tax return for at least the past three years to show prospective mortgage lenders.
If you run your financial affairs through a company and haven’t paid yourself a lot recently, get your accountant to prepare accurate accounts to show how much you could take out of the company to fund a mortgage comfortably.
Getting a deposit
While 100 per cent mortgages or those with a high loan-to-property value level have not been banned, they will be a lot more difficult to get hold of – and may be capped in future if the FSA finds their current proposals do not have a “sufficient effect”.
That means you will probably need to find a significant deposit, particularly if you want to enjoy a low interest rate. Generally, the smaller the deposit, the higher the interest you’ll pay – if you are made an offer at all. So get saving. Some people are getting round the deposit problem by getting relatives to help out with the deposit or guarantee part of the mortgage, which means they will be liable if you default on repayments. The best mortgages available today are available for borrowers and first-time-buyers with the biggest deposit or for the borrowers with the lowest loan-to-value mortgage with no credit card debts or any other debts.
Check your credit report annually
Crucially, your credit report needs to be in good order. It details your personal credit history of your credit accounts, such as credit cards and store cards, bank overdrafts, other loans and mortgages. Some credit card and store card providers even detail your last statement balance, how much you have paid off each month and if you are enjoying a promotional rate.
If you have a court judgment, bankruptcy, individual voluntary arrangement or debt management scheme against your name that will also be recorded, as will any financial association you have with someone else through a joint credit account or application. You’ll also find your electoral roll listing – lenders use it to check that you live where you say you do.
Lenders take the information in your credit report into account, as well as your application form and, soon, proof of earnings, when they decide whether to grant you a mortgage and on what terms – so check everything carefully to be sure that it’s up to date and accurately reflects your circumstances. You can see your Experian credit report for free with a 30-day trial of CreditExpert.
Clean up your credit history
It is expected that lenders will soon have to check how much you are spending on holidays, running a car and at Christmas before making a decision, so you need to demonstrate that you are a reliable and responsible borrower.
If you find an error in your credit report, contact the relevant lender and have the entry corrected. That also includes any inconsistencies in your address. For example, if your electoral registration says you live in a flat 4 but a lender has put it down as flat d, get it changed to match your registration.
If you have ever missed a payment on a loan or a credit card debt – details are recorded for 36 months or more – and there was a good reason, such as illness, ask the credit reference agency for a note of explanation to be put on your report.
If you have taken out a credit card for a rainy day, consider closing the account and sending it back. Lenders take into account the total amount of credit available to you, not just the amount you use, when deciding your creditworthiness.
If you are in stable relationship, it’s a good idea to get your partner to check his or her credit report. If you have recently broken up with a partner, make sure any joint credit accounts are closed and any record of your financial association is removed from your credit report. Lenders can check the credit reports of any financial associates when coming to a decision.
Prepare for any Finance application
Making multiple applications leaves a record on your credit report that can, in conjunction with other information, persuade lenders that you’re desperate for money or even planning a fraud, so you need to prepare carefully before applying for a mortgage.
Research the market to identify the most appropriate deal – try a comparison site such as www.lowermybills.co.uk, as well as personal finance websites and newspaper supplements.
If you’d like a better idea of how your application may be regarded, you can also order your Experian Credit Score for only £5.95 during the trial of CreditExpert. It won’t be the same as a credit rating calculated by a lender, as they all use different formulae and take information from your application as well as your credit report, but it will give you an indication of your chances.
It’s free to see your Experian credit report during a 30-day trial of CreditExpert, that’s a free credit report online.
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