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When you apply for a mortgage, the lender will carry out an affordability check to determine whether or not they think you’ll be able to make repayments. That means they scrutinise your bank statements. It’s worth knowing what to watch out for, so you can prepare and boost your chances of getting a mortgage.
Buying a house is stressful enough without having to worry about passing a mortgage application. Following the 2008 financial crisis, banks have become much more strict with their criteria for lending to aspiring homeowners.
This means that they’ll go through your financial records with a fine-toothed comb. They’ll try to spot any signs that you’re not responsible with your finances. If they have any reason to think you won’t make timely mortgage repayments, they could turn you down.
They may also be suspicious about the origin of the money you’re providing as a deposit. Everything needs to be clearly accounted for. If there’s anything that gives a lender pause for concern, your mortgage application could fail.
Having a good credit record is one of the most important factors when it comes to mortgage approval so we look at how to improve your credit score.
Here are five things you need to watch out for if you’re planning to apply for a mortgage in the near future.
- Future changes to your outgoings, such as childcare costs
- If you’re self-employed, you’ll likely need evidence of at least two years of income
- Cryptocurrency may be frowned upon by lenders
- Using Buy Now, Pay Later services such as Klarna can harm your mortgage chances
- Gambling can damage your mortgage chances
Read more: A simple guide to buying your first home
1. Changes to your outgoings, such as childcare costs
Lenders don’t just need to factor in what you can afford to repay now. They also need to think about how your affordability might change in the future. For example, if you have a child on the way, your lender will probably take this into account. It could negatively impact how much you’re able to borrow.
“Childcare can be particularly significant in cost and therefore could have a real impact,” said David Hollingworth of broker L&C Mortgages.
“This can include applicants who have a new baby. This could affect income levels, but lenders will generally take into account back-to-work income where applicants are already on maternity leave.
“However, there could be questions of whether there will be childcare costs to take into account on the return to work.”
If you are planning to apply for a mortgage and you have a new child or one on the way, make sure you factor this in when considering the repayments you’ll be able to afford.
2. If you’re self-employed, you’ll probably need evidence of at least two years of income
“A common hurdle for mortgage applicants is the self-employment challenge,” explained Amanda Aumonier of online mortgage broker Better.co.uk.
“Lacking a two-year track record can quickly close doors. The way lenders often disregard variable income like bonuses and overtime, despite their significance for many, adds another layer of difficulty.”
Generally, self-employment by itself is not a reason for an applicant to pay a higher mortgage rate, or be turned down altogether. However, make sure you’ve got at least two years of accounts before you apply, or you may find that most lenders are reluctant to grant you a mortgage.
Read more: How to pay taxes as a freelancer
3. Using cryptocurrency profits towards a house purchase may be frowned upon by lenders
If you’re one of the lucky ones who rode the wave of a cryptocurrency bull market and turned it into cold hard cash, it may not be as easy as you think to move your gains from blockchain to bricks and mortar.
Due to anti-money-laundering regulations, it’s important for lenders to be able to verify the source of your mortgage deposit. The decentralised and anonymous nature of cryptocurrency makes this difficult. Criminals laundering money frequently use digital currencies to do so, as it can be difficult to trace their origin.
This means that if you’re bringing cryptocurrency profits to the table as part of your mortgage deposit, many lenders may turn you down right away. This isn’t a blanket policy across all banks, so it’s worth checking ahead of time.
Can I use cryptocurrency for a house deposit?
Some lenders will allow you to fund your mortgage deposit in part or even entirely with cryptocurrency profits.
“Those that may consider it will need to be able to see some track record of the investments,” said Hollingworth.“That may be possible from a cryptocurrency exchange. However, make sure you flag the source of a deposit where cryptocurrency was involved.”
To work out what your options are, consider speaking to a mortgage broker. They’ll be familiar with the quirks of various lenders, and will be able to advise you.
4. Using and abusing buy now, pay later services such as Klarna
Buy now, pay later (BNPL) allows consumers to split the cost of a purchase into instalments. These can be paid over several months without any interest charged.
However, even if missed or late payments do not cause fees to rack up or even be visible on your credit report, they are terribly obvious to someone looking at your bank statement – someone like a mortgage lender assessing your financial behaviour, for example.
BNPL has become an incredibly popular way to pay, especially among young people. According to research firm Finder, 55% of millennials use BNPL services. Unfortunately, it’s younger prospective homebuyers who tend to run into problems caused by using BNPL when applying for a mortgage.
“First-time buyers especially have had issues with Klarna and other BNPL services not being repaid and causing issues with bad credit scores,” said Amanda Aumonier from Better.co.uk.
“However, most people who are looking to buy a home tend not to use BNPL schemes as they’re busy squirrelling money away.”
It’s not only missing Buy Now, Pay Later payments that can harm your mortgage chances, but over-reliance on them. “If there is heavy use of BNPL, it could potentially be factored into affordability,” said Hollingworth.
If you want to spread the cost of a purchase to make it more manageable, consider using a 0% purchase credit card. Not only does this let you spread repayments over up to two years, but making repayments can actively improve your credit record. This could actually boost your mortgage chances down the line.
5. Gambling can harm your mortgage chances, or mean you won’t be able to borrow much
Lottery ticket purchases or the odd deposit with a bookmaker are unlikely to cause you to fail a mortgage application. However, a history of heavy gambling could count against you.
“Outgoings like regular gambling could be considered in the affordability calculation where lenders can see regular outgoings. This could reduce the level of borrowing,” said Hollingworth.
If you’re planning on applying for a mortgage soon, and you gamble frequently, toning down your habit may prove helpful.
Read more: How to improve your credit score
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