Background
A mortgage application involves a forensic examination of the finances and financial habits of the applicants. Below is a (non-exhaustive) list of the main red flags to avoid. Please note that adverse credit history is not included here, i.e. arrears on loans, revoked credit card, etc. If you think you may have adverse credit history, you should order your credit history report first, then contact us to discuss the contents, severity, explanation, etc.
1. Referral Fees
Referral fees (sometimes known as irregular account charges) are penalties that are incurred when there are insufficient funds in your account for a particular payment. The bank allows the payment to be made anyway, but they charge you around €4 to €5 for their trouble. Having one or two such charges over the six-month assessment period does not automatically mean your mortgage application will be declined. If they were exceptional and if it is clear from your other accounts that there is not an overall shortage of funds, then they won’t damage your chances too much. On the other hand, multiple referral fees would make the banks nervous that there won’t always be enough funds in your account to cover the (much larger) monthly mortgage repayment.
Solution: Always keep enough money in your current account to cover all direct debits, standing orders and other payments. A good way to approach this is to change the baseline account balance in your mind from zero to a higher amount, say, €200 or more. This way, even an unexpected debit will not lead to a referral fee. A backup solution would be to get an approved overdraft on your account. However, this should only be used sparingly and any overdrawn balance should be cleared frequently to minimise interest payments.
2. Unpaid Fees
These charges are similar to referral fees, but with an unpaid direct debit or standing order, the payment is not honoured by the bank and does not go to the intended recipient. In the case of an unpaid direct debit, the company taking the payment would usually present the direct debit again for payment two weeks later. These are in the same category as referral fees, in the sense that they arise due to a temporary shortage of funds. However, unpaids are seen as a little more serious, especially if is a direct debit for a loan repayment, utility bill, insurance payment, etc.
Solution: As above, it’s essential to ensure that there are sufficient funds in your account at all times to cover direct debits and standing orders.
3. Late or Missed Credit Card Payments
Ideally you should clear your credit card balance in full each month. If that is not feasible, then you should have a direct debit set up to pay the minimum payment every month. Of course, you should always pay off more than the minimum amount, but having a direct debit will ensure that you don’t ever forget to make a payment. If your payment is made after the scheduled payment date, your next statement will include as a late payment fee. This is to be avoided, as it is another sign of bad money management or even a severe shortage of funds. That said, the occasional late payment will not automatically mean that your mortgage application will be declined. What is much worse is not making any payment at all until after the next statement is received. In such cases, the credit card issuer can report it as a missed payment on your credit history, which will remain on your record for five years.
Solution: Set up a direct debit payment for your credit card – ideally for the full balance each month, but for the minimum payment at the very least.
4. Cash Withdrawals From Your Credit Card
Withdrawing funds from your credit card is a very expensive way to get cash. Your credit card provider will usually charge a cash advance fee of around €2.50, so it’s never advisable unless absolutely necessary. Having one cash advance fee appearing on a credit card statement may not rule you out of getting your mortgage approved, but any more than one would be problematic and should be avoided. When a mortgage underwriter sees a cash advance fee on a credit card statement, he or she will check your current account balance on that date, to confirm whether there were funds in your account. If there were plenty of funds available, then it would not be a major issue, as perhaps you simply did not have your current account ATM card with you at the time. If, on the other hand, funds were very low in your current account, then it is a clear sign of a shortage of money, which would make the underwriter nervous about the mortgage repayment being made.
Solution: Never withdraw cash from your credit card.
5. Excessive Use of Overdraft
Of course, it would be better to avoid using an overdraft at all, with the associated annual fee and high interest rates charged on overdrawn balances. However, in the context of a mortgage application, there is no problem with regular use of an approved overdraft facility. As noted above, it is much better for your account to go into an approved overdraft than to miss a direct debit payment or to be charged a referral fee. Naturally, the lower the overdraft limit and the less frequently it is used, the better.
Solution: If you prefer to have an overdraft facility available, use it sparingly, never exceed the overdraft limit, and always make sure that your account is back in credit when you get paid.
6. Online Gambling
This is not as black-and-white as many people think. Having the occasional flutter will not automatically disqualify you from getting approved for a mortgage. However, the amounts and the frequency should be kept to a minimum. One thing to avoid completely is using your credit card for betting, as gambling using credit is definitely frowned upon.
Solution: If you simply must predict the future, do it from your debit card and only with a small fraction of what you can demonstrably afford.
7. Pattern of Taking out Short-Term Loans
Having a current loan or previous loans is not necessarily a problem in isolation, but we sometimes see cases where an applicant has a history of taking out multiple loans, including loans taken out to consolidate other debts, for example a credit card balance. In such cases, the bank will reasonably assume that this pattern will continue, which would impact on the affordability of the mortgage.
Solution: Try to minimise loans and credit card debt.
8. Paying Rent in Cash
Rent is a crucial part of proving your repayment ability for the proposed mortgage. The only certain way to quantify your rent payment is to show it in your bank statements every month. Some landlords still insist on collecting rent in cash, but this will certainly reduce your options and may even rule out getting approved for a mortgage. If you cannot get your landlord to accept payment of rent by bank transfer, the best alternative is to withdraw the same amount on the same date every month to show some evidence of the rent being paid. You would also be expected to provide a copy of your lease.
Solution: Insist on paying rent by bank transfer.
9. Lack of Regular Savings
Another critical element of showing your repayment ability is savings. If your current rent or mortgage repayment closely matches the repayment for the new mortgage that you are applying for, then savings on top of this is not necessarily essential. However, if your proposed mortgage repayment is more than your rent/current mortgage, then you should aim to save every month, even if you don’t need to save any more towards your deposit.
Solution: Look upon regular savings as a way to show the bank that you can afford the mortgage, and not purely for building up your deposit and associated costs of buying a property.
10. Only Saving Bonuses & Commissions
Many applicants are paid regular commissions and bonuses. While this additional income may be expected to continue in the future, banks don’t like to exclusively rely on such variable income for savings, when it comes to proven repayment ability. If you spend all of your basic salary each month and only save from additional variable income that is paid less frequently, then some banks may reduce the mortgage amount that they will approve.
Solution: Try to save from salary every month, not just every few months when commissions or bonuses are paid.
About MMPI
MMPI is an award-winning Irish broker offering you expert mortgage advice on owner-occupier and investment mortgages. Our experienced and qualified team of mortgage brokers will guide you through the various types of mortgages and will advise you on the best options suited to your specific needs.
