A common question I’m asked by potential home owners is ‘can I get a mortgage if I’m in debt?’
The short answer is: it depends.
Here’s some more info…
Can I get a mortgage if I have debts?
Debts won’t necessarily stop you from getting a mortgage, but lenders will take this into account when deciding how much to lend you and whether to approve your application at all.
Lenders will usually consider your ‘debt-to-income ratio’. This is basically how much debt you have as a percentage of your income. The exact criteria will differ from lender to lender and while one may deem your debt to income ratio too high, others may approve your application.
What do lenders assess when deciding whether to offer me a mortgage?
When you apply for a mortgage, potential lenders will want to know:
- How much you’ve saved for a deposit
- How much you earn
- How strong your credit rating is
- How much debt you have
When assessing your debts, lenders will asses:
- Credit card debts
- Bank loans
- Payday loans
- Car finance payments
- Store cards
Why do lenders take debt into account when deciding whether to approve a mortgage?
When deciding whether to give you a loan or not, lenders will want to assess your track record for repaying debt. They’ll usually do this by looking at your credit rating.
Lenders will also carry out ‘affordability checks’ to determine how likely you are to be able to repay the loan they give you. Affordability checks will involve looking at your income and expenses to figure out how much you can afford to pay in mortgage repayments each month.
For example, if your mortgage repayments will be £500 a month, you pay £350 a month in credit card payments and car payments, and you earn £1,300 a month in your job, lenders may decide that your finances are a little tight.
To learn more about buying your first home, take a look at Can’t Swing a Cat’s first time buyer blog section.
Will a bank overlook my debts if I have a large deposit?
If you have a large deposit, there is a chance banks will be more forgiving of your debts. This is because the more money you put down as a deposit, the less risky lenders will consider the loan to be. This is because if you were unable to make repayments, the lender could use your property to retrieve the money they’ve leant you.
If, however, you’re buying a home with a small deposit, lenders will likely want your finances to be in perfect shape.
Thinking of taking out a loan so you have a bigger deposit? It’s not worth it. Having that extra debt will make it harder to pass lenders’ affordability criteria and it’s extremely unlikely you’ll be able to hide this loan from them.
Can I get a mortgage if I’ve used payday loans?
Payday loans can make it much harder to get a mortgage but not necessarily impossible.
If you’ve used payday loans, it’s wise to do the following:
- Wait until at least 12 months have passed since your last payday loan was paid off before applying for a mortgage
- Apply for a mortgage through a broker rather than going straight to a lender
How can I improve my chances of getting my mortgage approved?
- Close unused credit card and loan accounts
- Pay off existing debts to improve your debt to income ratio
- Check your credit history
- Get on the electoral roll if you aren’t already
- Use a mortgage broker – they’ll have a thorough understanding of the mortgage market and will show you which lenders are most likely to approve your application
Should I apply for a mortgage if I’m struggling to repay my debts?
Probably not, no. If you’re struggling to repay existing debts, it’s unlikely that a mortgage lender will approve your application.
Besides, getting a mortgage when your finances are already struggling simply isn’t a wise thing to do. I know it might seem like a way of slashing your expenses, especially if mortgage repayments are likely to be less than the amount you spend on rent.
If you’re thinking of applying for a mortgage but you’re struggling to repay your debts, it’s probably worth using the money you would have used for your deposit to pay off your debt and get back on the straight and narrow.
Can I get a mortgage if I have a debt management plan?
If you’re struggling with your debts, getting a debt management plan can help you to get back on track. However, a debt management plan can impact your credit history and therefore affect your ability to get a mortgage.
When lenders see that you have a debt management plan, they may consider this a sign that you have a track record for taking on more debt than you can afford. This is frustrating because perhaps you made some poor money decisions in the past or you went through a difficult period of time where you had no choice but to take on these debts. You may even be in a much better place financially now than you were back then. You might be really sensible with your cash and be a diligent budgeter! Nevertheless, lenders can be choosy sometimes and they might still reject you based on your past.
It may be the case that after completing a debt management plan, you’ll have to spend some time improving your credit record before you can get approved for a mortgage. It’s generally advisable to wait at least a year before making an application. This is because if you make an application and get rejected, this can harm your credit rating even further.
Should I use a mortgage broker if applying for a mortgage with debts?
100% yes. I honestly don’t know why more people don’t use mortgage brokers because in my opinion, they’re pretty much a no-brainer – whether you’re in debt or not.
A mortgage broker will take a close look at your finances to determine whether you’re in a good position to buy your own home. They’ll look at your income, your outgoings, your deposit and your debts.
A mortgage broker will have a thorough understanding of the mortgage market and they’ll use this knowledge to highlight the lenders most likely to approve your application, while steering you away from the choosier lenders who are likely to reject you based on your debt or other circumstances.
A mortgage broker will also compare dozens of mortgage deals to find the most cost effective one for you. This could save you tens of thousands of pounds over the course of your mortgage term.
Think of a mortgage broker as the person on the sidelines cheering you on while you embark on your journey to home ownership. In fact, they’ll be with you every step of the way until you collect your keys.
I used Habito for my mortgage broker and they helped me tremendously. Habito is a fee-free online mortgage broker which means you won’t be charged a penny for their services. Read my Habito review here.
If you decide to use Habito as your mortgage broker, sign up with my refer a friend link and you and I will each earn a £50 John Lewis voucher on successful completion of your mortgage.
If you don’t want to use an online mortgage broker, you can also find brokers via local estate agents or by searching for independent brokers in your area.