Can You Get a Mortgage with Existing Debts?
Buying a home is a significant milestone, but having existing debts can make the prospect of securing a mortgage seem daunting. Many people wonder, “Can I get a mortgage despite my debts?” The good news is that it’s possible, depending on how you manage your debts and present your financial situation.
In this blog post, we’ll explore how different types of debt impact your mortgage application and provide valuable tips on improving your chances of approval.
Understanding Debt and Mortgage Applications
When applying for a mortgage, lenders conduct a thorough “affordability assessment” to determine if you can manage monthly repayments. This assessment considers various factors, including your income, expenses, existing debts and how they have been serviced.
Our residential calculators can give you an idea of affordability.
Your Debt Isn’t the Entire Picture
Lenders look at your overall financial health, not just your debt. This means your ability to manage and repay debts responsibly plays a crucial role. Here’s what lenders consider:
- Income and Expenses: If you have a stable income and controlled expenses, lenders may view your application more favourably. Demonstrating that you can comfortably manage debt repayments while maintaining a positive cash flow can enhance your mortgage eligibility. Debt-to-income ratio can play a part in this.
- Financial Responsibility: Proving that you manage your debts responsibly by making timely payments can improve your credit score and strengthen your mortgage application.
Types of Debt and Their Impact on Mortgage Applications
Different types of debt affect your mortgage prospects in various ways. Understanding these can help you navigate your application process more effectively.
Student Loans
Government-backed student loans are often viewed less negatively by lenders because repayments are typically deducted from your pre-tax salary. However, commercial student loans might impact your application, especially if they are substantial or you have missed payments.
Credit Cards
Credit card debt can either positively or negatively affect your mortgage application, depending on how you manage it. Regularly maxing out your credit card and only making minimum payments can hinder your application if it seems you are always at the limit. On the other hand, using a small portion of your credit limit and paying it off in time can boost your credit score as it demonstrates you use funding responsibly and stick to your obligations.
Car Finance
Car finance is a common and often necessary debt. Lenders understand that vehicles are essential for commuting to work. If you consistently meet your car finance payments, it can indicate responsible debt management to potential mortgage lenders. The monthly payment is a deduction against your affordability like with all other debts.
CCJs and IVAs
County Court Judgments (CCJs) and Insolvency Voluntary Agreements (IVAs) significantly impact your mortgage eligibility. Most vanilla lenders are hesitant to approve mortgages for applicants with recent CCJs or IVAs. However, some specialist lenders might consider your application, especially if you have a substantial deposit. Professional advice should always be taken in this area.
Bankruptcy
A current bankruptcy or one that has been discharged within the past six years can severely limit your mortgage options. While obtaining a mortgage is challenging in these circumstances, a few lenders will consider these cases involving discharged bankruptcies, potentially at higher interest rates.
Find out Your Options
Identifying and Explaining Debt
Lenders prefer transparency and understanding regarding your debt. They need to know the reasons behind your debt to evaluate your financial habits. For instance, a one-off payday loan to cover an emergency expense is more understandable than a pattern of frequent, non-essential borrowing as this suggests poor cash flow.
Improving Your Mortgage Chances Despite Debt
If you’re concerned about your ability to secure a mortgage due to existing debts, there are steps you can take to improve your financial health and boost your application’s chances:
Check Your Credit Score
Regularly checking your credit score helps you understand your financial standing and identify areas for improvement. Make sure there are no errors in your credit report and take steps to rectify any issues. We would recommend using CheckMyFile to review your current credit situation.
Make Timely Repayments
Consistently making debt repayments on time shows lenders that you are a responsible borrower. Avoid missing any payments, as this can negatively affect your credit score and mortgage eligibility.
Avoid New Credit Applications
Applying for new credit before a mortgage application can impact your credit score and raise red flags for lenders. It’s best to avoid any new credit inquiries during this period if possible or discuss with your mortgage adviser.
Reduce Your Debt-to-Income Ratio
The debt-to-income ratio is a key metric lenders use to assess your ability to manage additional debt and all lenders have a different threshold (some more specialist lenders do not have any at all). Lowering this ratio by paying off existing debts or increasing your income can improve your mortgage prospects.
Seek Expert Mortgage Advice
Navigating the complexities of mortgages and debts can be overwhelming. That’s where Kerr & Watson come in. As mortgage and protection advisors, we offer personalised advice to help you improve your financial standing and increase your mortgage approval chances.
Our expert team will guide you through the process, tailor your application to suit lender requirements, and provide support at every step.
Conclusion
Securing a mortgage with existing debts can be challenging depending on the circumstances but achievable with the right approach. By understanding how different types of debt affect your application and taking proactive steps to manage your finances, you can significantly improve your chances of mortgage approval.
At Kerr & Watson, we specialise in helping clients navigate their financial complexities and achieve their homeownership dreams.
Contact us today for expert mortgage advice and take the first step towards owning your new home.
