How to get a mortgage approved as a first-time buyer

First-time buyers are more likely to be rejected for a mortgage now than they were before the pandemic, according to a lender.

Just over a third (35 per cent) of those looking to buy their first home today will get a mortgage on the first attempt, according to Aldermore’s analysis.

This was down from almost half (48 per cent) in March 2020, before the pandemic began and house prices started their rapid rise.

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 half of prospective first-time buyers said they were rejected for a mortgage once, and a further one in five said they were turned down at least twice.

Challenges around credit history, administrative errors by the lender, and deposit size were cited as the most common reasons for rejection.

Chris Sykes, associate director and mortgage consultant at Private Finance said: ‘It’s possible that first-time buyers are in a worse position than others thanks to the pandemic and are more likely to have used unsecured debts to pay for things during a time of furlough or unemployment.

‘As a demographic usually first-time buyers are younger and less well-off, and in many cases their jobs were more heavily affected by Covid.

‘For example those in the service industries or those earlier into their careers were deemed not as essential and therefore may have been furloughed for extended periods.’

And Aldermore’s research also showed that first-time buyers were now more likely to be rejected for multiple reasons, rather than just one.

Other major reasons for rejection included being self-employed or having irregular work; having taken a payday loan; having made too many credit applications or having large amounts of debt.

Jon Cooper, head of mortgage distribution at Aldermore said: ‘It’s easy to see from the research why many first-time buyers can feel disheartened by the challenges when looking for their first home.

‘They shouldn’t despair though, as there are many options open to them.’

How to overcome mortgage challenges

Half of prospective first-time buyers have experienced disruption to their employment, for example through furlough or redundancy, since the pandemic began, according to Aldermore’s research.

This has left two in three worried about their financial situation, while one in five are concerned that their credit rating has become worse since the Covid-19 outbreak.

Poor credit history was the number one cause of mortgage rejection, and over a quarter of prospective first-time buyers said credit history was a big concern.

Some 36 per cent said they were actively looking to improve their credit score to increase their chances of securing a mortgage.

Being in an overdraft, student loans, missed bill payments and gaps in employment were the main credit issues affecting first-time buyers applying for a mortgage, Aldermore found.

So what should first-time buyers do if they have these debts?

‘Being in overdraft and student loans do not generally affect your ability to get a mortgage, except from an affordability standpoint,’ said Sykes.

‘A mortgage broker should be able to determine if you are eligible for a more specialist mortgage, or if you need to work on your credit first.’

He added that having no credit history could also be damaging.

‘Poor credit can be as simple as the lack of credit. Often clients find just taking out a credit card, using it for normal expenditure well inside the credit limit and clearing it in full on a monthly basis works to improve their credit,’ he said.

‘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. It can take years to build credit, so start early.’

For aspiring first-time buyers concerned about their credit history, the advice is to figure out what’s missing on their credit file and work towards improving it.

Aldermore’s Jon Cooper said: ‘There are quick things you can do to help; registering on the electoral roll, setting up direct debits to ensure regular bills such as rent, streaming subscriptions and council tax are paid on time, alongside reducing or paying off an overdraft or 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.’

‘Every little thing will make it easier to show you can afford repayments and that you’re responsible in that commitment.

A mortgage broker can help to highlight any issues in advance to save you from going out and doing multiple applications, which can negatively impact a person’s credit score

There was also a noteworthy proportion that had more significant credit issues.

One in nine prospective first-time buyers said the had taken out a payday loan; seven per cent had a County Court Judgement, and six per cent had experienced a bankruptcy in their past.

However, even with serious credit issues, it is not necessarily impossible for first-time buyers to get a mortgage.

Sykes said: ‘If debt is not well-managed this is when the problems arise and either you cannot get a mortgage, or you need to go to a more specialist lender.

Specialist lenders, which include Aldermore, are smaller banks and building societies which can sometimes be more flexible in their decision-making than the big high-street names. However, they will often charge higher rates.

Cooper added: ‘If you have CCJs and defaults, or have a very poor score, you may need a 15-20 per cent deposit rather than a 5-10 per cent deposit as you are a higher risk applicant and a lender needs more security.’

‘You may need to pay a higher rate initially, but making all your mortgage payments on time will improve your credit rating making it easier to get a better rate when you apply for a future loan.’