What Happens if Your Mortgage Is Declined?

A mortgage application rejection can feel disheartening, especially when you’ve set your sights on buying a property.

However, it’s important to know that a declined mortgage isn’t the end of the road. Understanding why it happened and how to address the issue can help you turn things around. 

This article explores what happens if your mortgage is declined, the possible reasons, and the steps you can take to improve your chances of approval.

Understanding Mortgage Declines

When a mortgage lender rejects your application, it means they’ve decided not to provide you with the loan based on their specific criteria.

Mortgage declines can occur during:

• The initial application review
• The underwriting process
• After a decision in principle

The key is to identify the underlying reasons and address them effectively.

Common Reasons for a Mortgage Decline

1. Poor Credit History

Lenders use your credit history to assess your financial reliability. If your credit score is low or you have negative marks on your credit report, it may signal that you are a risky borrower.

• Missed or Late Payments: Failing to pay credit card bills, loans, or utility bills on time can lower your credit score and reduce lender confidence.
• Defaults or County Court Judgments (CCJs): Defaults or legal judgments for unpaid debts can severely impact your mortgage application.
• High Utilisation of Credit: If you’re using a significant portion of your available credit limit, it may indicate financial strain.

Example:

If your credit score is 500 due to missed payments on a personal loan, a lender may reject your application as they might worry you’ll struggle to meet mortgage repayments.

If you’ve defaulted on a credit card payment in the past six months, it might raise red flags for lenders.

2. Insufficient Income or Affordability Issues

Lenders assess your ability to afford the mortgage repayments based on your income and outgoings. If your income is deemed insufficient for the size of the mortgage you’ve applied for, the lender may decline your application.

• Employment Type: Some lenders may hesitate if you’re on a zero-hours contract or have irregular income streams.
• Overestimating Affordability: Applying for a mortgage larger than what your income comfortably allows could result in rejection.

Example:
If your monthly income is £2,500, but the mortgage repayment is estimated to be £1,400, the lender may decide it’s too high a risk, especially when considering other expenses.

3. High Debt-to-Income Ratio

If a significant portion of your income goes toward repaying existing debts, lenders may view you as overextended.

Your debt-to-income ratio compares your total monthly debt payments to your gross monthly income. A high DTI suggests that a large portion of your income is already allocated to existing debts, leaving little room for mortgage payments.

• What’s Considered High? Most lenders prefer a DTI below 40%, though this varies by lender.
• Impact on Applications: A high DTI can indicate financial overextension, making lenders wary of approving additional credit.

Example:
If your monthly income is £3,000 and your existing debt repayments are £1,500, your DTI is 50%, which may be too high for many lenders.

4. Inadequate Deposit

The size of your deposit directly affects the loan-to-value (LTV) ratio of your mortgage. A smaller deposit increases the LTV, which in turn increases the risk for lenders.

• Typical Deposit Requirements: Most lenders require at least 5-10% of the property value as a deposit, but larger deposits (e.g., 20%) may make you a more attractive borrower.
• Why It Matters: A higher LTV means the lender is providing a larger percentage of the property’s value, which increases their potential loss if you default.

Example:
If you’re applying for a 95% LTV mortgage but can only provide a 3% deposit, the lender may decline your application as it falls short of their requirements.

5. Irregular Employment or Income

Being self-employed or having an inconsistent income stream can complicate your mortgage application. Lenders often require stable employment and proof of regular income.

Having a steady income is a key factor for lenders when assessing affordability. If your employment status or income stream doesn’t meet their expectations, it could lead to a rejection.

• Self-Employment Challenges: Lenders typically require two to three years of accounts or tax returns to assess self-employed income.
• Frequent Job Changes: If you’ve recently changed jobs or work on short-term contracts, lenders may view your income as unstable.

Example:
Tom, a freelance graphic designer, was declined because he only had one year of accounts. His income, though consistent, wasn’t supported by the two years of records the lender required.

6. Property Issues

Sometimes, the decline isn’t due to your financial situation but the property itself. Lenders must ensure that the property is suitable as collateral for the loan.

• Non-Standard Construction: Properties made of unconventional materials (e.g., timber frames, concrete, or glass) may be harder to sell, making lenders reluctant to finance them.
• Structural Problems: Issues like subsidence or damp can make the property unsuitable for a mortgage.
• Leasehold Concerns: Short lease terms or unclear ownership arrangements can deter lenders.

Example:
A buyer’s mortgage application was declined because the property they wanted to purchase had only 50 years left on its lease, which was too short for the lender’s criteria.

7. Incomplete or Inaccurate Documentation

Lenders rely on the information you provide to assess your eligibility. Missing or inaccurate documents can lead to delays or outright rejection.

• Proof of Income: Incomplete payslips, tax returns, or bank statements may fail to verify your income accurately.
• Identification Issues: Errors in personal details like your name or address can cause discrepancies.

Example:
If your application lists your annual income as £40,000 but your payslips show £35,000, the inconsistency might result in a rejection.

Immediate Steps After a Mortgage Decline

1. Don’t Panic

A rejection doesn’t mean you’ll never get a mortgage. Many people secure a mortgage after an initial decline by addressing the issues identified.

2. Request an Explanation

Ask the lender for the specific reasons behind the decline. Understanding their rationale helps you take corrective action.

3. Check Your Credit Report

Obtain a copy of your credit report from agencies like Experian, Equifax, or TransUnion. Look for inaccuracies or areas that need improvement.

4. Avoid Multiple Applications

Reapplying for a mortgage immediately with different lenders can harm your credit score further. Take time to address the issues first.

How to Improve Your Chances of Approval

1. Boost Your Credit Score

• Pay bills on time to establish reliability.
• Reduce outstanding debts.
• Register on the electoral roll to improve your credit profile.

2. Save for a Larger Deposit

A larger deposit reduces the loan-to-value (LTV) ratio, making you a less risky borrower.

Example:
If you initially applied for a 90% LTV mortgage and were declined, increasing your deposit to achieve an 85% LTV could improve your chances.

3. Review Your Affordability

Ensure your monthly income can comfortably cover mortgage payments and other expenses. Reducing unnecessary spending can also demonstrate better financial management.

4. Seek Specialist Advice

Consult a mortgage broker, especially if you have unique circumstances like self-employment or a poor credit history. Brokers can identify lenders more suited to your profile.

Reapplying After a Mortgage Decline

Before reapplying, ensure you’ve addressed the reasons for the initial rejection. Here’s how:

• Wait for Improvements: Allow time for changes (e.g., credit score improvement or debt reduction) to reflect on your profile.
• Tailor Your Application: Align your application with lender requirements.

How To Avoid Mortgage Rejections in the Future

1. Prepare Thoroughly

Ensure all documents, such as payslips, bank statements, and tax returns, are accurate and up-to-date.

2. Understand Lender Criteria

Each lender has unique requirements. Research and apply to lenders whose criteria match your financial situation.

3. Get a Decision in Principle (DIP)

A DIP gives you a clearer idea of your borrowing potential before making an offer on a property.

Frequently Asked Questions (FAQs)

1. Can I apply for a mortgage immediately after being declined?

It’s better to wait until you’ve addressed the reasons for the decline to improve your chances.

2. Does a mortgage rejection affect my credit score?

A single rejection doesn’t directly impact your score, but multiple applications can.

3. What if my credit report contains errors?

Contact the credit agency to dispute and correct inaccuracies.

4. Can a mortgage broker help after a rejection?

Yes, brokers specialise in finding lenders suited to unique or complex financial situations.

5. Is a declined mortgage a permanent record?

No, lenders don’t share decline information. However, your credit report may show associated hard searches.