Can first-time buyers get a mortgage with debt?
We are often asked, ‘Can first-time buyers get a mortgage if they have debt?’
The answer is, ‘yes’! But there is a caveat: it all depends on how much debt you have. If your monthly payments are so high you have little left over, then your chances of a mortgage offer reduces.
But let’s look more closely at how debt can affect the chances of a first-time buyer securing a mortgage.
Can first-time buyers get a mortgage with debt
If you’re applying for a mortgage, lenders will carry out an assessment about your affordability. What that means is they will consider whether you will be able to afford the mortgage repayments on the property you want to buy.
The assessment includes looking at your salary, expenses, savings and any debts you may have. They will then look further at these factors to work out whether you can truly afford the mortgage.
Debt to income ratio
This tool is used by lenders to work out whether you can easily afford the mortgage despite having debts. It refers to the amount of debt you need to pay back each month as a percentage of your gross monthly income. That’s the income you receive before tax is taken out.
Criteria Name:
Maximum debt to income ratio
Criteria Description:
Indicates the maximum potential debt to income (DTI) ratio a lender might accept. For example, an applicant has outstanding unsecured debts of £26,000 and a salary of £40,000. Therefore their DTI is 65%.
Lenders work this out an annual basis.
The lower the percentage, the more confident a lender is about giving you a mortgage. Many lenders won’t lend if the debt to income ratio is 50% or more.
At The Mortgage Dot, we have access to a lender that has no DTI criteria and we work with the underwriter for a manual decision.
Some lenders will offer a mortgage if you have a higher ratio. But it could mean you can’t borrow as much and may not have enough to buy the property. You may need to choose a cheaper property or wait until you have paid off more debt.
Here is an example of how having a car loan of £400 a month can affect the amount that a mortgage lender will offer. This calculation is worked out for a first-time buyer who is single and looking to buy on their own.
Illustration 1:
House price: £110,000
Deposit: £11,000
Annual gross salary: £25,000
Debts: £0
Maximum loan: £106,975
If the buyer needs a home loan of £99,000, they are likely to be offered a mortgage.
Illustration 2:
House price: £110,000
Deposit: £11,000
Annual gross salary £25,000
Debt: Car payment of £400 per month
Maximum loan: £49,185
If this buyer also needs a £99,000 home loan, they will be turned down.
What else do lenders look at?
As well as your debt to income ratio, lenders will look at other factors.
Expenses
If you have reduced your monthly spending and are using your money to pay debts back, this will be looked on favourably.
Why did you take on debt?
They will also look at what your debt was used for. For example, if you had to take a loan to cover a one-off expense such as an unexpected, expensive repair on your home. Having such an event might be looked on more favourably than you taking out a large loan to pay for a five-star holiday or the latest iPhone.
How do you handle debt?
They will also consider the way you manage your debts. If you pay on time and regularly, it is a sign that you know how to manage debt. But if you miss payments or have defaulted on a loan it shows up in your credit record. This affects your credit score.
You may still be offered a mortgage with a poor credit score, but you may need to apply to a specialist lender. If you’d like to know more about credit scores, check out our earlier blog.
Key debts
There are some key debts that can make a difference to how lenders react to your mortgage loan requests. With these, the lender will look closely at your individual situation. Here are some of the main areas they will look into.
Car finance: Lenders will look at how easily you afford the monthly payments. They may also consider how essential the car is. But they do understand that it is a large expense that requires paying for over time.
Credit cards: A credit card can show lenders you are responsible about borrowing. But they will consider how wisely it’s used. For example, do you pay your bill in full each month? If you max out your card and then only pay the minimum amount or miss a payment, this could affect your chances of a mortgage offer.
Mobile phones: Your phone contract isn’t likely to be a problem because mobiles are seen as fairly essential. But if you have missed any payments or defaulted on a contract in the past, it could affect your mortgage offer.
Payday loans: If you’ve taken a payday loan in the last six years, it could prove difficult securing a mortgage. Some lenders will not offer if you have ever taken this type of loan. If it was taken out as a one-off measure due to unexpected circumstances, a lender may consider your application favourably. But, on the whole, lenders don’t like payday loans.
IVAS & CCJs: Having an Insolvency Voluntary Arrangement or a County Court Judgementwill impact your chances of securing a mortgage offer. And if you do, it’s likely to be at a high interest rate. We’ve looked at this topic in an earlier blog.
Student loans: If you took out a loan from the Student Loans Company, it won’t affect your chances of getting a mortgage.
Bankruptcy: Anyone declared bankrupt will find it tricky to get a mortgage. There are a few lenders who are willing to offer a loan after a year and the more time passes the greater the chance. But it isn’t easy. We’ve looked at how to get a mortgage after bankruptcy in an earlier blog.
How can we help?
The Mortgage Dog has enjoyed working with a lot of first-time buyers in all situations. So, if you are a first-time buyer with debt who is looking for a mortgage, contact our friendly team today
Your home may be repossessed if you do not keep up repayments on your mortgage.
