According to lenders, first-time buyers now have a higher chance of being rejected for mortgages than before the crisis.
Aldermore reports that 35% of buyers who want to purchase their first house today (or just under a third) will receive a mortgage in the first attempt.
It was almost half of the 48% in March 2020 (before the pandemic and rapid increase in house prices).
Aldermore bank’s First Time Buyer Index, which involves a survey of 2,015 prospective first- time buyers, found that many continue to experience mortgage rejection
Nearly 50% of first-time buyers claimed they were denied for mortgages at least once.
Most rejections were due to problems with credit, lender administrative mistakes, or deposit size.
Private Finance’s Associate Director Chris Sykes said that it is possible for first-time home buyers to be in worse financial shape than other people due to the pandemic. They may have borrowed unsecured money to cover their expenses during times of unemployment or furlough.
“First-time buyers, as a group, are typically younger and less financially well-off. In many cases their jobs were also more severely affected by Covid.
“For example, people in the service industry or early career workers were considered not essential. They may therefore have been furloughed.
| Cause | Percentage |
|---|---|
| Poor credit history | 21% |
| A lender made an administrative error | 21% |
| I did not have enough money to deposit. | 20% |
| I had taken out a loan for payday. | 18% |
| I am self-employed. | 17% |
| It hasn’t been my home for all of these years. | 17% |
| My debts were very high | 17% |
| Too many credit application | 15% |
| My partner and I were not included on the electoral rolls | 14% |
| My partner and I were not making enough money | 14% |
Aldermore’s research showed that buyers who are first time buyers tend to get rejected for more reasons than one.
Another reason for rejection was being self-employed; not having regular work; taking out payday loans; making too many credit requests or having too much debt.
Jon Cooper, Aldermore’s head of mortgage distribution said that many first-time home buyers feel discouraged by the difficulties involved in finding their first house.
They shouldn’t be discouraged, there are plenty of options available.
How to solve your mortgage problems
Aldermore’s research shows that half of potential first-time buyers experienced some disruption in their jobs, such as furlough or resignation, since the outbreak.
Two thirds of people are now worried about their finances, and one is. One in five people are worried about their credit scores since the Covid-19 outbreak.
A poor credit score was the main reason for mortgage rejection. More than 25% of potential first-time buyers stated that credit history was an issue.
36% of respondents stated that they are actively seeking to raise their credit scores to be more likely to get a mortgage.
Aldermore discovered that first-time mortgage buyers were most affected by credit problems such as an overdraft and student loans. Also, they had to pay late fees.
| The Issues | Affected proportion |
|---|---|
| Use my excess | 29% |
| A student loan was available | 24% |
| Paying late on bills | 21% |
| A gap in employment | 21% |
| Been responsible for dependents (e.g. children) | 21% |
| Been in credit card debt | 21% |
| In my past, I’ve had gambling transactions | 13% |
| Payday loans can be taken | 13% |
| Source: Aldermore | |
What should first-time buyers do, if they are saddled with these types of debts?
Sykes stated that being in an overdraft or student loan does not affect your ability to obtain a mortgage.
A mortgage broker can help you determine if it is possible to get a specialty mortgage or whether your credit score needs to improve.
He also said that having no credit history can be detrimental.
“Poor credit is as easy as having no credit. He said that clients often feel they can increase their credit by simply getting a credit card, spending it on normal expenses within the credit limit, and then clearing it each month.
‘However your credit rating is never a short term fix – if you have just taken out a credit card three months ago your credit rating will have unlikely benefited from the management of it yet. You can build credit over many years so get started early.
If you are a first-time buyer and concerned about your credit score, it is important to determine what they haven’t done correctly.
Jon Cooper of Aldermore said that it was possible to quickly help by registering to the electoral rolls, setting up direct deductions to pay regular bills, such as rent and streaming subscriptions. This can also reduce or repay an overdraft student loan.
‘When using credit cards, ensure you do not go near your credit limit to convey you’re not overly-reliant on credit and are responsible in using it.’
“Everything will help you show that you are able to afford the repayments, and that your commitment is responsible.
An experienced mortgage broker will help you to identify potential problems in advance and save you the hassle of applying for multiple loans, which could negatively affect your credit score.
A notable proportion also had significant credit issues.
One-in-9 prospective first-time buyers stated that they had used a payday loan. Seven per cent of them had received a County Court Judgement and six per percent had had bankruptcy proceedings in the past.
First-time buyers can still get mortgages even if they have bad credit.
Sykes explained that “if your debt isn’t well managed, then this is when the issues arise. Either you can’t get a mortgage or you have to find a specialist lender.
Aldermore is one example of specialist lenders. These are small banks and building societies that can be less rigid in making decisions than big, high-street brands. They will charge higher rates, however.
Cooper stated that a 15% deposit may be required if there are defaults or CCJs. Also, a lender will need more security if you’re a high-risk applicant.
Although you may have to pay more initially, keeping up with your payments will help improve your credit rating and make it easier for future loans to be approved.
