Getting a Mortgage When In Debt

In this article, we’ll explain how to get a mortgage when in debt, what level of debt is acceptable and why using the services of a mortgage broker with experience in this area can help boost your chances of success.

Can you get a mortgage with debt?

The short answer is yes. It is unrealistic for lenders to demand that every one of their borrowers is without any kind of debt before they’re willing to grant them a mortgage. Such is the fabric of modern-day financial norms and necessities, very few people would be able to get on the property ladder if they had to be completely debt-free first.

Lenders realise that people have student loans to pay off, car financing commitments, credit card bills to settle and various other personal loans over their heads they may have needed in the past, so luckily, they don’t have a blanket approach to debt.

How much debt is acceptable?

How much debt and how you’re managing it will be key to how successful you are in securing a new mortgage. The lower your debt-to-income (DTI) ratio (how much your loan repayments are compared to your wage or other income every month), the better position you’ll be in.

If you’re struggling to manage your repayments, consider seeking independent advice. Resources like MoneyHelper’s guide on getting help with debt can provide support and guidance.

Your application will be stronger if you can demonstrate strong repayment management and sufficient cash flow for another debt, such as your mortgage.

A good mortgage broker can examine your circumstances in greater detail, but as a general rule, if your DTI is less than 20%, you will face fewer hurdles than if it were 50%.

Work out your debt-to-income ratio

Understanding whether your DTI is low, medium, or high will help you prepare before you submit a mortgage application. Enter your details into our calculator to better understand how lenders might assess you.

Does the kind of debt you have matter?

Yes, the nature of your arrears could affect how lenders consider your application, and there is undoubtedly a perspective of ‘good’ and ‘bad’ debt. For example, student and car loans are usually perceived as everyday-type financing, whereas stacked-up store and credit cards or payday loans are often viewed negatively.

Some lenders will insist that any payday loans must be cleared before considering your mortgage application.

You’re likely to struggle more to get a mortgage if you’ve had bad credit in the past, such as a County Court Judgement (CCJ) or have been declared bankrupt, but it’s not impossible.

Is it better to pay your debts off before applying for a mortgage?

Being financially stable is always the best action when taking on a mortgage. You’ll likely have a better credit score if you don’t have debts, and you will be considered a more attractive borrower and may be rewarded. However, as long as you are proving you are staying on top of your financial commitments, it’s not necessarily crucial that you pay off your debts first.

How long should you wait to apply?

This depends wholly on what kind of debt it is and how much it is. Your broker can advise you further on this, but if you find your debts are an obstacle to getting your mortgage approved. Generally, your credit report might only take a month or so to update once you’ve settled a debt, with the improvement you need in your credit score showing to lenders, too.

How to get a mortgage with outstanding debt

If you’re applying for a mortgage with outstanding debt, make an enquiry with us so we can match you with a mortgage broker who specialises in helping customers in this exact situation. The advisor we handpick for you will guide you through the following steps to full application…

• Downloading and optimising your credit files.  This will allow you time to remove any inaccurate or outdated information that could further hinder your application
• Gathering your paperwork and preparing the documents you’ll need. Any proof of income – payslips or certified accounts if you’re self-employed, bank statements and proof of I.D. required
• Finding the right mortgage lender. Your broker can identify lenders who look more favourably on applications from someone who has some outstanding debt

How to improve your chances of getting a mortgage

In addition to the steps outlined above, there are several other actions you can take, such as:

• Reviewing all of your outgoings and removing anything that’s not necessary, reducing your overall debt-to-income ratio
• Using any savings you have (outside the amount needed for a deposit) to reduce your current debt level
• Review your credit records regularly to make sure all the information held is accurate
• Ensure all your debt commitments are paid on time and don’t fall into arrears.

Remortgaging with outstanding debt

The same rules apply when remortgaging as when applying for a mortgage initially. That is, you are not immediately discounted for a mortgage if you have debts. Instead, lenders will consider the level and nature of the debt, your DTI, and how you manage the repayments.

It might be worth speaking to your broker about considering a debt consolidation remortgage, which can be an option so long as loan-to-value ratios are not exceeded and whether it falls within a lender’s approval criteria for how the debt was accrued.

Speak to a broker experienced in dealing with debt and mortgages

All is not lost when getting approved for a mortgage, even though you still have debts to repay. There are options, and crucially, lenders mostly operate an individualistic approach to applicants, which means the stronger your application, the better position you’ll be in.

The specialist brokers in our network offer an impartial, expert, and supportive hand to clients who are ready to start the process of applying to finance a house purchase. With unparalleled contacts and experience, they can work with you to ensure the very best outcome. Call us on 0330 818 7026 for a free initial consultation or make an online enquiry for details.