Updated: Sep 7
I read an article on Mortgage Strategy a few weeks ago regarding confusion amongst first time buyers and their ability to get a mortgage. The confusion stemmed from background debts and whether or not mortgage lenders would decline applications if any debt was present in the background when applying.
This is a question I get asked on a daily basis by customers looking to buy their first home, so, I thought I'd try and shed some light on the subject.
Background debts are not generally a problem for mortgage lenders, but the level of debts can potentially be an issue. As a rule of thumb, lenders will take into account any debts as follows;
Credit Cards - 3% of outstanding balance (some are 5%)
Loans/HP/PCP - monthly payment taken
Store Cards - generally treated the same as credits cards
Student Loans - payment taken from payslip
Lenders will also factor in on-going costs like service charges & ground rent for lease-hold properties.
If there is too much debt in the background, your debt to income ratio may be a cause for concern which could lead to a decline at agreement in principle stage.
The amount you can borrow will be affected by background debts and lenders will reduce the amounts depending on the above figures. If you are planning to buy your first home, my advice would be the following:
1) Check your credit file - this will show all active accounts and balances, and will show any adverse credit that could cause an issue
2) Send over to your Financial Advisor for them to review
3) Close any credits cards that you don't use and really don't need
4) Don't open any more credit facilities 3 months before or during the application process
5) Be open and honest about all debts - not disclosing something could lead to a decline
The best thing you can do is get a Financial Advisor working with you before you start looking at any properties. They will explain the process, go through your borrowing capacity and explain all of the in's and out's of applying for and maintaining a mortgage. Some charge a fee, some don't, but their experience is priceless and they will help you every step of the way.
I hope this has been useful.