Securing a mortgage while managing debt can be complex, especially in the current economic environment. However, it’s not impossible.
In this guide, we walk you through the essential considerations for obtaining a mortgage when you have existing debt, offering a comprehensive understanding of what lenders look for and how you can improve your chances.
What is considered debt when buying a home?
When applying for a mortgage, lenders will scrutinise your financial situation to assess your ability to repay the loan. Understanding what is considered debt in this context is crucial. Generally, credit card debt, personal loans, car loans, student loans, and other financial obligations are included.
Any outstanding balances on your credit cards, loans taken for personal reasons excluding those secured against your home, financing obtained for purchasing a vehicle, outstanding student loan balances, and other financial commitments such as alimony or child support are all considered.
These debts are summed up to evaluate your overall debt profile, which significantly impacts your mortgage application.
How much debt is acceptable for a mortgage in the UK?
In the UK, lenders use various metrics to determine how much debt is acceptable for a mortgage. One of the primary metrics is the debt-to-income ratio (DTI), which measures your total monthly debt payments against your gross monthly income.
Typically, lenders prefer a DTI of no more than 36%, with no more than 28% of that debt going towards your mortgage repayment.
However, some lenders may allow a higher DTI ratio, especially if you have a strong credit score or substantial savings.
How do you calculate debt-to-income ratio for a mortgage?
Calculating your DTI ratio is straightforward. First, add up all your monthly debt payments, including credit cards, loans, and any other financial obligations. Then, divide this total by your gross monthly income and multiply by 100 to get a percentage.
For example, if your monthly debt payments total £1,500 and your gross monthly income is £4,000, your DTI ratio would be 37.5%.
Lenders use this ratio to gauge your ability to manage monthly payments and repay the mortgage.
Can you get a mortgage with an IVA?
An Individual Voluntary Arrangement (IVA) is a formal agreement with creditors to pay off your debts over a period. Getting a mortgage with an IVA can be challenging, but it’s not impossible. Some lenders specialise in offering mortgages to individuals with IVAs, but the terms may be less favourable, such as higher interest rates or a larger deposit requirement.
It’s important to shop around and consult with a mortgage advisor to explore your options.
How long after an IVA can you get a mortgage?
The waiting period after completing an IVA before you can get a mortgage varies. Generally, it takes about three to six years for an IVA to drop off your credit report, which significantly affects your mortgage availability. However, during this period, you can take steps to rebuild your credit score, such as making timely payments on all your bills, keeping your credit card balances low, and avoiding taking on new debt.
Once the IVA is removed from your credit report, your chances of securing a mortgage improve significantly.
Here are 10 Ways to Increase Your Chances of Getting a Mortgage for additional tips.
Getting a mortgage while managing significant levels of debt can be tough. However, by simply educating yourself on what lenders look out for and knowing what constitutes debt, you give yourself a much better chance of being approved. It’s also important to remember that debt management solutions do not fully prevent you from being approved for a mortgage.
However, it is essential to be aware that solutions like IVAs and Bankruptcy can make obtaining a mortgage more challenging in the short term.
For further insights on managing debt and homeownership, see our article on Getting a Mortgage During Debt Management.
