If you’re considering stepping onto the property ladder but are worried about how your debt might affect your chances of securing a mortgage, you’re not alone. The mortgage world can seem like a minefield – especially if you’re navigating the homeownership process for the first time – but it doesn’t need to.
For most people, a mortgage is one of the biggest financial decisions they’ll ever make. For that reason, it’s important you know the different things that could potentially hinder your chances of making your dreams a reality.
What is a debt to income ratio?
If you’re preparing to apply for a mortgage and have done your research into what lenders typically look for, you might have heard of the term ‘debt to income ratio’ and wondered what it is.
It’s essentially the name given to how much of your gross monthly income you spend on debt repayment and is used as a means of determining whether you can handle another credit agreement on top of your existing payments.
For example, if you earn £3,000 a month and £1,000 of it gets spent on debt repayment, your debt to income ratio would be 33%. To calculate your debt to income ratio, add all your monthly debts, divide the figure by your gross monthly income, and multiply by 100 to get a percentage.
There are two types of debt to income ratio you should be aware of: your front-end ratio, which is the percentage of your gross monthly income spent on housing costs, and your back-end ratio, which is the percentage of your gross monthly income spent on all debts, including housing costs.
Remember to include your total monthly debt payments when calculating your debt to income ratio, including any mortgage or rent arrears, credit cards, personal loans, council tax arrears, overdrafts, student loans, and child maintenance payments. Some payments, such as utility bills, phone contracts, subscriptions, and groceries, don’t need to be included.
How much debt do you have?
How can I reduce my debt to income ratio?
It’s not recommended to apply for a mortgage with a high debt to income ratio. However, there are various steps you can take to reduce your debt to income ratio, ensuring your finances are in the best possible position for a mortgage.
Here are some actions you can take to get your debt to income ratio under control:
Pay off high-interest debts first
Focusing on the debts with the highest interest rates first can help you tackle your overall debt load quicker, speeding up the debt repayment journey and lowering your debt to income ratio in the long run.
Boost your income
If you’re still paying the same towards your debt but earning a higher salary, your debt to income ratio will automatically decrease. To do this, consider a new job, pay rise, or side hustle.
Limit your credit applications
As well as boosting your income, limiting your credit applications will also cause your debt to income ratio to drop. Even a credit card with a low credit limit can harm your debt to income ratio as soon as you start making payments on it.
How much debt is acceptable for a mortgage (UK)?
Before applying for a mortgage, it’s important to know whether your debt could potentially stop you from being approved. However, because each lender uses different assessment criteria, it can be difficult to accurately predict whether your debt will be accepted for a mortgage.
Mortgage lenders look at a variety of factors when assessing applicants. This means that, even if you have the same debt level as someone else, another factor, such as how old the debt is or the type of debt, could be what determines the final outcome.
Each lender has different criteria for what’s considered a suitable debt to income ratio for credit, but anything under 35% tends to be what most mortgage lenders look for. Some lenders might be willing to let a higher debt to income ratio slide if you have a higher credit score and a stable income, but this depends on the individual lender.
It’s a common misconception that a higher income will offset a high debt to income ratio, but this isn’t true. Even if you earn a good salary, having a significant amount of debt in relation to your salary will still give you a high debt to income ratio and harm your chances of being approved for a mortgage.
Some mortgage lenders also specialise in mortgages for people who have a history of debt. Reaching out to specialist lenders before contacting high street lenders can improve your chances of being approved and prevent your application from being rejected, which can cause further damage to your credit score.
How do different debts impact mortgage eligibility?
While mortgage lenders look at every aspect of your finances, different debts can have different impacts on your ability to get a mortgage.
Here are how different debts impact mortgage eligibility:
Student loans
If – like most people – your student loan repayments come from your pre-tax salary each month, it’s unlikely to impact your mortgage application too much. Lenders don’t tend to worry about this type of debt as it technically qualifies as a government-backed financial scheme.
However, this is not a guarantee. It all depends on how large the student loan was, whether you’ve made consistent monthly payments on it, and how much of it remains unpaid.
Credit cards
The impact of credit card debt on mortgage eligibility isn’t as straightforward as other debts. It depends on how you use them.
Using credit cards wisely can help you build a good credit score – even if you’ve previously had poor credit – which can boost your mortgage eligibility. To do this, keep your credit utilisation below 35% and pay your credit cards off in full each month.
Car loans
Like credit cards, the impact of car loan debt on mortgage eligibility depends on how well you manage your payments. It’s important to keep up with your side of the agreement and inform your car loan provider if you think you won’t be able to make your next payment.
If you can prove to lenders that you’re capable of meeting your car loan payments each month, you can demonstrate that you’re a responsible borrower who can comfortably manage mortgage repayments.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
What else do lenders look for when reviewing mortgage applications?
When you apply for a mortgage, your debt to income ratio is just one of the many factors lenders consider.
Here are some of the other things lenders look for when assessing mortgage applications:
Your deposit
How much you’ve managed to save for a down payment on a mortgage will be one of the first things lenders look at when you submit your application. Generally, the more you can pay, the less you’ll need to borrow.
Having a bigger deposit can mean lenders see you as low risk, which will not only increase your chance of being approved but ensure you’re offered the most favourable terms. This can also open you up to a wider range of mortgage options.
Your employment status
For a lender to be reassured that you’ll repay your mortgage in full and on time, they want to see proof of steady employment. This essentially means that you’ve had the same job for an extended period and get paid enough to cover your monthly payments.
Being self-employed or earning an irregular income can make it difficult to get approved for a mortgage as there’s no guarantee that you’ll meet your mortgage obligations each month.
Your credit score
Another thing lenders look at when assessing mortgage eligibility is your credit score. This is a three-digit number that reflects how likely you are to repay money borrowed based on your financial history.
Certain things, such as having too much debt or missing too many payments, can bring your credit score down and make it difficult to find a lender willing to give you a mortgage. However, there are various things you can do to boost your credit score over time.
Your spending habits
Even if you can prove you have the funds for a mortgage, what you spend your money on will also be scrutinised. Most lenders will ask to see around six months’ worth of past bank statements.
They will mainly be looking for how much you spend on your essential living costs compared to your non-essential expenses. Spending more than what they deem acceptable on entertainment and hobbies can hinder your chances of getting a mortgage.
How can I improve my chances of getting a mortgage with debt?
If you’re looking to get a mortgage with debt, it’s crucial to know what kinds of things you can do to boost your credit score and improve your chances of being accepted.
Here are some of the actions you can take to boost your mortgage eligibility while you have debt:
Be realistic
When shopping for a mortgage with debt, it’s important to be realistic. Not every lender will be willing to give you a mortgage – especially if your debt is significant or recent.
It can be easier to predict the outcome of your application if your debt is on either end of the scale, but for those in the middle, it can be a little trickier to determine.
Lenders can also change their lending criteria from time to time, meaning that you’re not guaranteed to be accepted just because you took out a mortgage with them in the past, for example.
Save for a bigger deposit
Saving for a bigger deposit can improve your chances of being approved for a mortgage while you have debt.
This is because you’ll need to borrow less from the lender and it won’t be as much of a risk for them to lend to you.
However, it’s important to remember that your deposit is just one part of the puzzle. Lenders will consider various other factors when deciding whether to approve you for a mortgage.
Consider a joint mortgage
If you’re struggling to build a decent deposit on your own, you might want to consider buying with someone else, like a partner or spouse.
Buying with someone who has a stronger credit score or a higher income can boost your chances significantly.
However, getting a joint mortgage is a big commitment and not a decision that should be made lightly. Before committing to moving in together, take the time to consider all factors to ensure you’re both happy to proceed.
Seek free mortgage advice
Applying for a mortgage is likely the biggest financial move you’ll ever make.
It’s therefore important that you’re open to any advice you can get – especially if it’s available free of charge from a professional mortgage advisor.
They will let you know how much you can borrow and help you find the right mortgage deal for your circumstances, lowering the chances of your application being rejected.
Use a specialist lender
Using specialist lenders or debt mortgage lenders can boost your chances of being approved for a mortgage with debt.
Even if your credit score hasn’t recovered, a specialist mortgage broker or lender can help you find the best deal for your circumstances.
They tend to have more flexible lending criteria, offering another opportunity to get a mortgage if you have a complex credit history and you’ve been turned down by high street lenders.
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
Can I get a mortgage after a debt solution?
It can be difficult to get a mortgage while you still have unpaid debts on your credit report, but what about after you’ve completed a debt solution, such as a debt consolidation loan or bankruptcy?
While a debt solution can help you repay your debt and improve your financial outlook in the long run, it can take some time for your credit score to recover. Because of this, you won’t automatically go from not getting approved to getting approved as soon as your debt solution is complete.
Getting a mortgage after a debt solution might also require a bigger deposit and you’ll likely be subject to higher interest rates to balance the extra risk to the lender.
The chances of you being approved for a mortgage after a debt solution also depends on which debt solution you used. Remember, the fact you were in a debt solution is just one of many things that are considered when you apply for a mortgage and won’t automatically sway the lender’s decision either way.
Conclusion
Buying a home is one of the biggest financial decisions you’ll ever make, so it’s important you’re in good financial standing before you apply. This includes getting a clearer picture of your debts and whether they’re likely to affect your eligibility for a mortgage.
There is no exact amount of outstanding debt that will stop you from getting a mortgage. Lenders will look at various things when reviewing your finances for a mortgage, including the types of debt you have and how old they are.
From saving for a bigger deposit to using a specialist lender, there are various steps you can take to boost your chances of getting a mortgage while you have debt.
