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Receiving your mortgage agreement in principle (AIP) can feel like a tremendous weight off your shoulders. Home buying can be a stressful process at the best of times, but getting an AIP is a sign that you're a step closer to achieving your dream property.
Unfortunately, the possibility of your mortgage being declined after receiving an AIP isn't as rare as you might think. According to research conducted by Which, over 41% of young people have faced mortgage rejection, most often in areas like London and the West Midlands.
Getting a mortgage declined - particularly after getting it agreed in principle - is a huge blow, and can make you feel like your chances of securing your dream home are over. This is not the case. There could be a number of reasons why your mortgage was declined after receiving an AIP, some of which can be solved in a straightforward manner.
A mortgage agreement in principle is an indication from a mortgage lender that they're in theory willing to lend you a specific amount of money for a new property. The amount they're willing to lend is based on specific details you've provided about:
Essentially, an agreement in principle is a simple way of finding out whether you can borrow the amount you need to buy, or remortgage a property, without a full credit check.
While an agreement in principle should give you some confidence that the lender is willing to support your mortgage, it's not a legally binding contract. Though AIPs are useful for indicating how much the lender could offer in theory, the agreement isn't a formal offer of a loan, which means it's not a guarantee that you'll get a mortgage.
Before following up on an agreement in principle, lenders will process the information you've provided by carrying out a credit check through an agency. They will also verify your chosen property meets their lending criteria by carrying out a valuation through a surveyor.
In some cases, your lender might only be prepared to lend 85% instead of the full mortgage described in their AIP, or they might be prepared to offer the same with a higher rate of interest. Most likely this is because the surveyor's valuation was lower than the asking price of the property.
Lenders calculate how much they're willing to loan through a loan-to-value (LTV) ratio. The bank may agree in principle to lend you 80% of the value of a £100,000 house. However, if the value of the home you're looking to buy is different than expected, this could affect your final mortgage offer. If a survey finds that it's worth less, the bank won't automatically allow you to borrow the same amount. Instead, they'll offer the same ratio of loan to value. For example:
You receive an AIP of £350,000 for a house worth £370,000. The loan-to-value for this is 94.6%. If the house however, is valued at £340,000, the loan-to-value will stay the same, so they may offer you £320,000 instead. This means you are offered £50,000 less than the price to which you have agreed with the property seller.
However, if the property you want to buy is worth more, they may not increase their offer in line with this ratio (loans are usually capped at 4.5 times your annual salary), and you may have to bridge the gap with savings.
Whatever their reasons, both your lender and financial adviser should be able to tell you why your mortgage was declined. If they fail to provide an explanation, you can always make a formal complaint.
Whether you have an AIP or not, the reason for why your mortgage has been declined is usually the same: the lender's credit agency has found something in your credit report that doesn't meet the lender's criteria. Your credit report is essentially a confidence check, and your credit score is a good indication of how trustworthy a mortgagee you'll be.
Some of the reasons you might be refused a mortgage include the following:
According to MoneySuperMarket, if you own more than 20 - 25% of a business (from which you earn your main income), lenders will deem you as self-employed. While self-employed workers have access to the same range of mortgages as everyone else, there isn't an employer ready to vouch for their wage. This means you'll need to verify your income by maintaining accurate accounting records, creating regular financial reports, and keep copies of all your tax returns. There are also lenders that cater specifically for self-employed applicants through a specialist mortgage.
When you apply for a mortgage, the lender's credit agency will examine your past financial behaviour to assess how likely the lender is to get their money back. They will examine your debts and whether you've been issued with bankruptcy in the past 6 years. The worse your credit history, the harder it is to get a mortgage.
If your last mortgage was refused, you're more likely to have your next one refused too. After conducting a hard search of your credit report, credit agencies leave a footprint. Too many footprints will suggest you have debt problems. In the same sense, if you've had your home repossessed in the last 6 years, this will indicate to credit agencies that you've previously failed to make repayments on your mortgage.
Being able to prove you're on a steady income, and in stable employment, is necessary for a successful mortgage application. While having proof of more than 3 month's employment is ideal, there are always exceptions to this rule, as every lender has their own criteria. For example, according to the Nationwide-Intermediary website, applicants who've been in new employment for 1 month or less need to provide both their latest payslip, and their last from a previous employer.
Whether you're an abstainer, or just never got round to registering, there are downsides to not being registered to vote. Being refused a mortgage is one of them. One of the ways mortgage lenders verify both your identity and location is through the electoral roll. You can register to vote here on the Gov.uk website.
Lenders target key demographics in order to maintain the continual repayment of their mortgages. In a 2020 study conducted by Statista, the largest share of homeowners who purchased their home with a mortgage was in the age range of 45 to 54 years old. Equally, it can become more difficult to get a mortgage in your late 50s, as lenders will assume your income will be reduced during retirement.
As mentioned earlier, even if you have a mortgage agreement in principle, you can still have your primary application rejected. Though this can be incredibly frustrating, understanding why is the first step towards a successful application.
The surveyor's valuation doesn't match your offer
Though it's possible that a lender, after a surveyor's valuation, could reduce the amount initially offered in their AIP, they could also reject your mortgage altogether. A lot rests on your property's valuation, and if it’s widely different to the amount requested, you're likely to have your mortgage declined.
Your property doesn't match their mortgage restrictions
Lenders have restrictions on who they offer mortgages. What these restrictions are, vary from lender to lender. Some won't let you borrow against a new build property, while others won't let you borrow on a flat above a shop. These count as risky investments, even if they fall within the amount they're willing to give.
Your financial situation doesn't match the information you provided
Lenders carry out a hard search of your credit report during mortgage applications. If your financial situation doesn't 100% match the details you initially provided, your application might get rejected.
Your financial situation doesn't meet their restrictions
Some financial situations are unattractive to mortgage lenders. For instance, many lenders won't lend to you if a certain percentage of your deposit is a 'gift' from someone else. Most, if not all lenders, prefer applicants who have been employed for a long period. If you’re employed, you’ll generally need to be able to show a minimum of 3 to 6 months' worth of payslips.
If your mortgage application has been refused, you're probably wondering how your credit score looks. It's important to note that your credit rating is safe. While your credit report indicates that you've applied for a mortgage, it won't show whether you were successful. However, every time a credit agency conducts a hard search on your report, it will leave a footprint.
A hard search footprint indicates that you've applied for credit. The more hard searches on your credit report, the more times it appears you've applied for credit. The reason a hard search leaves a footprint, is to show other lenders that you might be a risky investment. We recommend spacing out your mortgage applications in order to demonstrate that you're a trustworthy investment.
If your mortgage application is declined after receiving an agreement in principle, you need to work out why, and how you can fix it.
Finding out why your mortgage application was rejected
One of the best ways to get answers, is to simply ask your lender why they rejected your mortgage application. There's usually something specific that's put them off, which means you might have a good chance of fixing it quickly.
Unfortunately, not every lender will tell you why they rejected you. If this is the case, you could always check your credit report yourself for any evidence of poor credit history, or you could hire a mortgage broker. Mortgage brokers will help you assess your financial situation and find a suitable mortgage.
Boost the quality of your credit report
You may have been rejected because discrepancies in your credit report didn't match the details provided in your application. While an AIP is given after some preliminary searches, the credit checks that accompany a mortgage application are much more thorough, and will locate any red flags the AIP failed to find. That means boosting the quality of your credit report is a great way to secure a mortgage the next time you apply. Consider paying off any existing debts and lowering your credit utilisation. Your credit utilisation is the percentage of available credit you have used. According to an article by Forbes, a good utilisation rate is 30%, with 50% being the maximum.
Another way you can boost the quality of your credit report is by making sure all future payments are made on time and in full. This will prevent any discrepancies and debt accruements from taking place. It's important to be completely transparent about your finances by accounting for anything you may have missed.
Make your money go further
Mortgage providers might reject your application after an AIP, because they've reassessed your case and now doubt your ability to make substantial repayments. That's why it's important to maximise your finances by:
Space out your applications
While there isn't an exact timeframe for how often you can apply for a mortgage, we recommend waiting at least 1 year between applications. Most lenders only pay attention to applications that were submitted in the last 3-6 months, and, as mentioned earlier in the article, every application leaves a footprint on your credit report. This means the more applications you submit, the more obvious it is that you've previously applied for credit, which could turn off potential lenders.
If you're part of a property chain however, a mortgage declination can leave you with lots of fees - so you'll have to apply for another quickly.
While the chance of your mortgage falling through after an exchange of contracts is low, it could be costly if it does happen. That's because you're legally committed to purchasing the property, and if you can't fulfil this agreement, your deposit will be forfeited.
Unless you're a first-time buyer, you have probably entered a property chain. Property chains are fickle by nature: they are time contingent, and heavily reliant on all buyers and sellers concluding their deals in a succinct manner. This means you need to quickly work out what went wrong with your application in order to move forward.
Your credit report
If your rejection is a result of something you didn't disclose in your application, you need to find out what. If it's something you overlooked in your finances (like getting a new job or taking out a high interest loan), then you'll need to work quickly in order to secure a new mortgage and your deposit.
Mortgage brokers are your best bet here, as they will locate the next best lender to approve your application. They will also put you through the application process quicker, which is beneficial for a time contingent property chain.
However, if you've attempted to hide something serious, like bankruptcy or debt problems, this will almost certainly result in another rejection. In this situation, there's little you can do to prevent the chain's collapse. You'll have to lose your deposit and pay off any remaining debt.
If your application is rejected because of a valuation, the property might be worth much less than what the lenders are prepared to loan. We recommend renegotiating with the seller to see if they'll lower the price to an amount that's covered by the mortgage.
If this doesn't work, you could always seek out other properties that fit the limitations of your mortgage provider - however, you'll have to pay the seller's deposit if you've already exchanged contracts, which could be expensive.
Alternatively, the surveyor may have uncovered problems with the structure of the property, or located material types that don't fit the lender’s criteria. For instance, flats without an ESW1 certificate(external wall systems have been assessed for safety by a qualified expert) will be automatically valued at nil. If this happens, you can raise this issue with the seller. They'll be unable to sell their property to other people without one.
Having your mortgage application rejected after an AIP isn't ideal, but it's not the end of the world. The fact your AIP was approved means that your initial application showed promise. While not true for 100% of applicants, this usually means that some small adjustments are needed to remedy the issue. Hopefully you'll bag your dream property in your next application.
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