Debt and getting a mortgage

What is a mortgage?

A mortgage is a loan from a financial institution that you use towards the cost of buying a property – it can also be referred to as a secured loan.

To buy a house, usually at least 5% of the property’s price will need to be paid as a downpayment (a cash deposit), although this does vary, with the rest of the money being borrowed through a mortgage.

You’ll then pay back what you owe over a set period, typically a minimum of 25 years. This lengthy term is to help make the repayments manageable, given that mortgages tend to involve borrowing larger amounts of money – the longer you have to pay it back, the less you pay per month.

A mortgage is a secured loan which means the lender can take back (repossess) the property if you’re unable to make your monthly repayments. They would then sell the property to get their money back – sometimes this sale value is lower than what you owe meaning you would be left with a shortfall. This shortfall is still owed by you to the lender, and they would seek to recover this from you as a debt.

Can you get a mortgage with debt?

Yes, you can still get a mortgage if you’ve got outstanding debt. If you’ve not yet cleared your other debts, you might be worried about applying for a mortgage. However, while it may be easier to get a mortgage once you’re debt-free, this doesn’t mean it’s impossible.

Lenders usually base their decision on your financial situation and history. This means that things like the amount and type of debt you have, how long you’ve had the debt, how reliable you are at repaying a debt and your repayment history, and the circumstances of your debt will all contribute to a decision.

How much debt can I have and still get a mortgage?

Your debt-to-income (DTI) ratio can be a good indicator as to whether your mortgage application might be approved. Used by mortgage providers during the application reviewing process, this looks at your estimated monthly debts compared to your monthly earnings.

A debt-to-income (DTI) ratio measures how much of your monthly income goes towards paying debt. It's calculated by dividing your total monthly debt payments by your total monthly income, expressed as a percentage. Lenders use this ratio to evaluate your ability to manage debt and repay loans, according to Experian.

A low DTI ratio indicates to a lender that you practice good financial discipline and don’t have a hard time balancing your debts with your income. Meanwhile, a high DTI ratio may appear to a lender as though you still have too much debt to pay off to keep up with mortgage payments as well.

How long after clearing debt can I get a mortgage?

There is no set timeframe after clearing your debt before you can apply for a mortgage.  

A mortgage application will be assessed by the individual lender against their criteria. This will take into account factors such as how much you owe in total, your monthly payments and your credit score. If you’ve recently cleared debt it may be that your credit score will take a few months to update.

During this time, you can also review your credit report to check that nothing else could impact you being able to get a mortgage. Our credit file guide includes more information on what else to look out for that may affect you.

The best time to apply will be dependent on your own personal circumstances. There are mortgage professionals available to speak with to get a better understanding of what may be the best option for you.

What debt is considered when applying for a mortgage?

When you apply for a mortgage, the lender can see debts in your name and will take this into account when reviewing your application. Both outstanding debts and closed accounts from the last 7-10 years will be visible on your credit file.

This could include:

• Credit card debt
• Student loans
• Car finance
• IVAs
• CCJs
• Bankruptcy

As we’ve mentioned, your outstanding debt total isn’t the only thing that matters, as it’s important that lenders look at other factors to determine whether they can trust you with the mortgage amount you’re asking for. To put it simply, mortgage lenders review applications on a case-by-case basis.

If you’re concerned about a debt impacting your mortgage application, you can also seek advice from a mortgage adviser who will search what’s currently on the market and recommend the best deal for you and your individual circumstances.

Sometimes there are fees associated with seeking mortgage advice, so it’s best to ask about any potential costs beforehand.

Can you get a mortgage after an IVA?

Whilst you can get a mortgage after an IVA, this will depend entirely on the lender and their regulations.

For instance, to some lenders, a settled IVA is viewed more favourably than an outstanding one and may mean that you’re in a better position for a successful application.

Not every lender works in the same way though, and some will still be concerned that a previous IVA implies that you’ve dealt with problem debt in the past. This means that they may only lend to you once the IVA is removed from your credit file after six years.

Can you get a mortgage with a CCJ?

Yes, it is possible to get a mortgage with a CCJ, but the success of your application can vary depending on other related factors.

This could include when the CCJ was registered, what it’s marked down as on your credit file, and whether you’ve been keeping up with the payments, to name a few.

What else can impact getting a mortgage?

Aside from having outstanding debt, there are other things that can impact getting a mortgage. This can include:

A low credit score

Once you apply for a mortgage, lenders will look at your credit file. If your credit rating has been impacted by a CCJ, bankruptcy, or missed payments, for example, this could impact your ability to take out a mortgage. However, this doesn’t mean it’s impossible, and you can take the time to build up your score and then reapply. If you need help, we’ve got a useful blog on how to improve your credit score which includes some steps you can take.

Lack of credit history

Having no credit history can make getting a mortgage harder as lenders aren’t able to see how reliable you are at repaying your debts.

How much you’re able to put down as a deposit

If you try borrowing too much money, your application may be rejected. Levels of borrowing are based on affordability, so the more disposable income (the difference between your income and outgoings) you have, the better able you can demonstrate you can afford a mortgage payment. Some lenders may also limit the amount of borrowing based on annual income.

Mistakes on the application

There’s always the possibility of administration errors, and if there’s a mistake on your application or credit file then this might result in your loan being rejected. Before submitting your mortgage application, it’s important to check that all the information provided is up-to-date and correct.

Your employment status

Not having regular payslips, because you’re unemployed or self-employed, can make it difficult to prove that you can afford to keep up with mortgage repayments.

Your eligibility to vote

If you’re not on the electoral register at your current address then it may take longer for lenders to verify your identity. This could slow down the process or may even mean your application gets rejected altogether.

Is a mortgage a debt?

It’s also worth noting that your mortgage is considered a kind of debt. This is because even though it’s secured against a property, you’re still borrowing money. You’ll need to make monthly repayments which go towards clearing your total balance and any interest charged, as you would with any other debt. 

If you fall behind on your mortgage payments or have paid less per month than you should, you will be in ‘arrears’. Mortgage arrears can start to build up, and your lender may take further action if you aren’t able to pay back what you owe, which could include contacting you more often to agree on how you will repay the arrears.

If you’re concerned about being able to keep up with your mortgage, there are places you can turn to for expert advice. There may be a fee involved for using their service, but this depends on your adviser. You can get fee-free mortgage advice from the team at StepChange. 

Over on our debt guidance hub you can find even more guides on a range of debt-related topics along with how Lowell works together with customers on their journey to becoming debt-free with us.