The UK housing market has faced lots of challenges in recent years, particularly when it comes to securing a mortgage. As the Bank of England raised interest rates, mortgage rates also grew and many lenders withdrew their five-year mortgage products. Fortunately, lenders are starting to reintroduce longer mortgages again, however many still find it challenging to secure a mortgage. There are many reasons why a mortgage would be declined, and this can happen before and/or after a property valuation. These are detailed below, including what you can do when it happens to you.
Why are mortgages declined?
Securing a mortgage is an integral step in buying a home. Unfortunately, not every mortgage application is approved, and this can happen for a variety of reasons. Some of the leading reasons why mortgages are declined are related to the financial circumstances of the individual or parties applying for the mortgage.
These include the following:
1. Poor or limited credit history
One of the most common reasons for a declined mortgage is the applicant’s credit history. Missed payments, defaulted loans, or bankruptcy can negatively impact an applicant’s credit score. A low credit score might indicate to lenders that there’s a high risk of the borrower defaulting on the loan.
Having no or very little credit history can be just as detrimental as having poor credit. Without a proven track record, lenders can’t gauge how responsible an applicant is with credit.
2. Insufficient income
Mortgage lenders want to ensure that borrowers can afford the monthly mortgage payments. Particularly in the current climate whereby inflated mortgage rates have made it difficult for homeowners and landlords to be able to make repayments. So when applying for a mortgage, if the applicant’s income is deemed too low or unstable, it may lead to a declined application.
3. High debt-to-income ratio (DTI)
This ratio compares a mortgage applicant’s monthly debt payments to their gross monthly income. A high DTI can signal that an applicant is ‘overleveraged’ and may struggle to handle additional debt. This is generally considered unfavourable in mortgage applications and could be a reason why a mortgage is declined.
4. Inadequate employment history
Generally, mortgage lenders consider consistent employment as synonymous with stability. If you’ve changed jobs a lot of times, have gaps in your employment history, or even have just a short work history in your current job, lenders might deem you as higher risk.
5. Deposit is too small
The more equity a borrower has in a property from the outset, the less risk the lender assumes. If the down payment is too small, it may result in a declined application.
6. Interest rate and loan type
The type of mortgage and the interest rate can also play a role. For instance, someone who might qualify for a fixed-rate mortgage might not qualify for an adjustable-rate mortgage due to the potential for the monthly payment to increase in the future.
These reasons are all possible reasons why a mortgage application might be denied when you first come to apply. However, they are generally related to your financial situation, such as size of deposit or downpayment or credit history. They’re also a reflection of borrowing limits, which is something we’ve seen recently in the mortgage lender chaos that ensured. However, when a mortgage is declined after a valuation, this suggests other issues might be happening.
Why is a mortgage declined after a property or home valuation?
When a mortgage is declined following a property valuation, it usually suggests that there are issues related to the property itself. Property or home valuations are a huge part of the mortgage approval process, as they determine the estimated market value. This then influences a lender’s decision to grant or decline a mortgage.
A property valuation takes into account multiple aspects of the property alongside the current market. You can read more about the ins and outs of a RICS property valuation to get more of an insight as to what they involve. They’re critical as, when carried out by a RICS Chartered Surveyor, they are impartial and accurate.
If the property is valued incorrectly, this may affect the status of a mortgage application, and ultimately lead to it being declined. Overvaluation, for instance, can make a property seem more expensive than its real worth, which might make it difficult for borrowers to sell or refinance later on, thereby raising the chances of foreclosure. On the other hand, an undervalued property might prevent homeowners from accessing the equity they’ve built over time, limiting their financial flexibility in terms of selling or drawing from home equity loans.
Additionally, beyond the borrower’s financial capacities, certain issues intrinsic to the property—such as structural defects or legal encumbrances—can impact its perceived value, further complicating the mortgage approval. Therefore, when faced with a declined mortgage post-valuation, it’s important not to rush into reapplying. It’s usually more beneficial to first pinpoint and understand the root cause, and then consult with experts before applying again. A home survey from an independent assessor can help here.
What to do if your mortgage is declined following a property valuation
It’s not easy when your mortgage application is declined, especially when it happens after a property valuation and therefore might be outside of your control. However, these are the best steps to take if you do find yourself in this situation.
1. Seek expert advisory
Whether facing a decline or looking for alternatives, specialised advisors are really useful. They offer tailored solutions, from appealing the decision to strategising renegotiations or suggesting prospective lenders aligned with your property type and financial stance.
2. Leveraging independent RICS Surveyors
RICS-accredited surveyors provide unbiased property assessments, often delving deeper than standard valuation reports. Using their services can preempt potential issues, making your mortgage application more robust. Find out more about the difference between a survey and a valuation here to better understand the process.
3. Exploring multiple financial strategies
When confronted with down valuations, you could consider these options to help your application:
- Pay the difference: Bridging the gap between the valuation and purchase price.
- Increase the initial deposit: Offering a larger upfront sum can make the mortgage application more appealing to lenders.
- Renegotiation: Adjusting the property’s price with the seller based on the valuation report.
Ultimately, there are different reasons as to why a mortgage would be declined after a valuation, Discrepancies in property valuations can lead to lenders being wary of granting a mortgage, such as over or undervaluation, which may result in a house being perceived as more valuable than its actual worth, and other underlying issues such as structural defects or legal encumbrances. Seeking advice from reputable and trustworthy professionals in property valuations can help ease your mind that you’re gaining an accurate property valuation to support your mortgage application.