Covid-19 effect on rejection of mortgage applications
According to the data, the number one reason for a rejected mortgage application was that the prospective first-time buyer is self-employed or a contract worker (20%). This is a big change on our pre-lockdown First Time Buyer Index results in March 2 when it was only the 9th most common reason for an application being declined. As a result, nearly a quarter (23%) say they have given up being self-employed to secure a mortgage.
Other top reasons for prospective first-time buyers being turned down for a loan include deposit size (18%), salary intake (16%) and poor credit history (15%).
Overcoming challenges to secure a mortgage deal
23% of prospective first-time buyers say credit history is a big concern, with a third (34%) looking to actively improve their credit score to increase their chances of securing a mortgage. The main barriers affecting first-time buyers applying for a mortgage are having an overdraft (28%), a gap in employment (25%), student loans (25%) and credit card debt (21%).
There is also a noteworthy proportion that has more significant credit issues with one in twelve (8%) having taken out a payday loan, 7% having an account handled by collection agencies, and 4% having a County Court Judgement (CCJs) in their past.
Proactively seeking to improve credit profiles
Prospective first-time buyers are improving their credit with half (51%) ensuring they pay bills on time, over a third (34%) actively paying off debt, and nearly one third (29%) recently registering onto the electoral roll. Other credit rating improvement initiatives include closing unused credit cards (19%), reducing an overdraft (18%) and seeking debt advice (7%).
First-time buyers looking for support
The findings also show that first time buyers feel disheartened about the home buying process, especially during these uncertain times, with three in five (62%) stating that buying a home feels unachievable. The process of where to start applying for a mortgage is also daunting for many, with two thirds (64%) finding home buying a confusing process. These factors, alongside applying for a mortgage and waiting to see if it will be accepted, has made three in four (74%) first-time buyers feel the whole process is stressful.
Jon Cooper, head of mortgage distribution, Aldermore, comments on the findings:
“A decline for a mortgage can be a deflating experience for those looking to fulfil their dreams of homeownership, but do not despair as options for first-time buyers and the self-employed have broadened over the past decade. The growth of specialist lenders, who can handle more complicated applications, have allowed for credit issues to not be as much of a significant barrier to buying a home as it was before.
“The current generation of first-time buyers are now far more diverse, coming to the market with a wide range of financial backgrounds, but one constant is they all appear to find the process confusing and complicated, and the pandemic has only heightened this. It may feel daunting at times so we would recommend seeking advice from a mortgage broker that can give a whole of market view and provide options specific to a new buyers’ individual circumstances.”
Top tips to help secure a mortgage if you are...
Self-employed
In these uncertain times, the self-employed who are looking to buy their first home may have lost income this year. Lenders will fundamentally need to understand if a customer can afford the mortgage repayments and verify their income. Lenders generally are now requesting for two years of accounts in this period but will accept pre-Covid income based on the latest tax year (April 2019 to April 2020).
Lenders will then look to verify how the customer can afford the mortgage payments if their income has been impacted and whether income will return to expected levels or be different going forward. If someone who is self-employed has had their income affected by Covid-19, the best thing to do is provide as much information to your broker or lender as possible, so they can outline options and clarify if you need to do anything more.
First-time buyers
No matter how early in the process you are, we would encourage you to go seek advice from a broker. Our research found that 91% of prospective first-time buyers found their broker useful but only 14% had used one. They can give guidance on all aspects of the journey and there is no better time than now to get it, as they will give a whole of market view specific to your individual circumstances. If you have a smaller deposit, there are fewer products available than before lockdown, which means many new buyers may have to raise a bigger deposit, but for those with smaller deposits, there are still options available such as shared ownership and Help to Buy.
Credit issues
Credit issues can be a huge worry for first-time buyers. There are quick things you can do to help this; registering on the electoral roll, closing unused credit cards, paying off an overdraft or student loan. Every little thing will make it easier to show you can afford repayments and that you are responsible for that commitment. If this is a concern, reach out to a mortgage broker who can provide advice on improving your credit score and what mortgage options are available for you.
Credit issues are no longer as much a barrier to buying a home as they were in the past. Specialist lenders will consider borrowers with CCJs and other credit issues. You may need to pay a higher rate initially but making all your mortgage payments on time will improve your credit rating making it easier to get a better rate when you apply for a future loan.
In addition, the pandemic has caused over 1.9 million to apply for payment breaks, so you are not alone in being affected by this. Given the sheer volume, lenders are likely to be as considerate and understanding as they can in the future when reviewing this time period. People may be asked more questions than normal when applying for a mortgage as lenders are required by the industry regulator to ensure they are lending responsibly.
