Whether you’re investing in buy-to-let for the first time or already hold a portfolio of properties, waiting to hear whether or not your request for financing has been accepted can be a nail biting experience.
With that in mind, we thought we’d explore a few reasons why a buy-to-let mortgage may be rejected so that you can properly prepare and give yourself the best chance of securing the loan you need.
Let’s get started!
Failing to meet income and affordability criteria
Hitting the target on these two factors with as many mortgage providers as possible is vital if you:
- Want to get accepted
- Want the widest choice of offers available
This is obvious when it’s written down in black and white, but many have fallen at the first hurdle when submitting their buy-to-let mortgage applications.
While it will vary from lender to lender, £25k is widely considered to be the minimum income by most. This is especially true if it’s your first foray into the world of buy-to-let.
Some lenders will be more flexible about this, with a few having no income requirements whatsoever, but they will cover themselves in other ways...namely, the property’s rental income potential. If the property in question can hit the rental income percentage target set by the lender, you could still have your application accepted, even if your income level falls short.
Where your money comes from could also be a factor
Those in a salaried position with PAYE income will always be favoured by lenders, but it’s not essential. The self-employed are still, of course, eligible, but you will probably have to jump through a few more hoops in order to satisfy your lender of choice. This will, in general, amount to showing three years’ worth of books, but some will work with less.
Markets move, which is why we enter them in the first place, but they don’t always move in our favour...and that could result in your buy-to-let mortgage being rejected.
If the property market is particularly volatile at the time you make your application, you could find your future investment becomes down valued by the time a surveyor has a chance to cast their eye upon it. Lenders may come back at you with a lower offer, but they’ll often reject the application altogether.
Your deposit is wide of the mark
A deposit for a buy-to-let purchase will typically be substantially larger than a standard residential mortgage, and that can catch first-timers out.
Taking the market as a whole, the most common figure you’ll hear will be 75% loan to value (LTV), but some lenders will go higher. Deals with 80% or 85% LTV aren’t unheard of, but you probably won’t find them on the high street, so you will need a canny mortgage broker on your side if you find yourself falling short on the deposit front.
Rental income comes up short
As we touched upon above, rental incomes are an important factor in any mortgage providers’ decision to lend. The market has changed considerably in this regard, and lenders now expect to see an interest coverage ratio of anywhere between 125% and 145% (dependent on interest rate).
What does this mean to you as an applicant? Well, if your mortgage repayment stands to be, say, £500 per month, the amount your prospective property needs to fetch on the rental market would have to be somewhere in the region of £625 (125%) and £725 (145%).
This monthly rent projection would need to be verified by a surveyor. If their valuation comes up short, your lender may reject the application or come back to you with a lower loan amount.
Your credit history lets you down
While it’s not impossible to get a buy-to-let mortgage with a poor credit history, it does stop many applicants dead in their tracks each year. This is largely because they make their applications without first consulting a mortgage broker, and many lenders will not entertain those with anything less than a squeaky-clean history.
A mortgage broker knows this and, more importantly, knows who will accept those who have had previous credit problems. Specialist lenders are out there, but you obviously need to know who they are before you apply, otherwise your loan request may be rejected.
Your mortgage debt is already maxed out
Lenders can be wary of those who have already been highly active in the market and carry with them a large amount of existing mortgage debt. As with all things, the figure that triggers their alarms will vary widely from lender to lender, but most will have some sort of ceiling in place that will lead them to raise an eyebrow should you exceed it.
This could either be a monetary figure or simply the amount of mortgages you have in your name. Some will only be concerned with what you owe them, while others will take your overall borrowing with other lenders into account as well. Again, a good mortgage broker is your friend here.
Age could be a factor
Both at the upper and lower end, age is a factor when it comes to securing a buy-to-let mortgage.
At the youthful end, the minimum age is 18, but don’t be surprised if you run into lenders who have more prohibitive rules in their small print. Some have a minimum age limit of 25, which is quite a substantial difference.
Moving upwards, BTL mortgage providers will generally be happy to lend up to the age of 75, but some may go as high as 85 or have no cap whatsoever.
Property usage could put off some lenders
A straightforward buy-to-let property being used for an assured shorthold tenancy (AST) will pose few problems when submitting an application, but for those whose properties have a more specialist bent, seeking out the right lender is essential.
HMOs, holiday lets, student digs, and other non-AST properties will likely require a specialist lender, and failing to find one will probably result in your application being turned down flat.
You’re over the LTV threshold
If you hold four or more rental properties, lenders will consider you to be a portfolio landlord. This is more than a mere label, and it could affect your borrowing.
The vast majority of portfolio landlords will have outstanding debt (either elsewhere or with the lender they are making the application to) and that borrowing can come back to haunt you once you cross the four property mark.
Why would that be the case? Well, as a portfolio landlord, your LTV needs to be 75% or lower for most lenders to consider opening up their coffers.
All will be fine and dandy should you have taken out mortgages at 75% on your existing properties and the value of those rentals has increased since that time, but what about if you recently borrowed at 85%? Or if the market has temporarily gone against you?
Having an overall LTV of in excess of 75% for all properties in your name can be a cause for lenders to reject your buy-to-let mortgage, so if you’re starting to build your property empire, take heed.
Submitting paperwork with errors or missing documents
You’ve run all the numbers, checked your credit history, and the market is going in your favour...what could possibly go wrong now?
Somewhat surprisingly, a large number of mortgage applications get the big red rejection stamp simply because they have either been incorrectly completed or the applicant has failed to supply the lender with the correct documentation. (You should all have a picture of Homer Simpson smacking his forehead in your mind right now!)
Don’t get caught out by this. Go through the application thoroughly before you even pick up a pen, making sure you understand every section and the information required to please your mortgage provider. Make a checklist of documents and anything you need to look up or supply - only then should you start to fill out this very important piece of paperwork.
A lot of the above can be avoided if you have an experienced and reputable mortgage broker working with you. Here at Petty’s, we always recommend David Cade of Clarity Financial Management to anyone who asks, as we know from experience that David always delivers.
If you’re interested in other aspects of buy-to-let, check out the landlord section of our blog or give us a call. We’re always happy to help.