Count court judgements, defaults explained and effect on mortgage applications

 

Count court judgements, defaults explained and effect on mortgage applications

When a lender assesses an application, one of the main factors they look at second to only income and affordability is credit status and risk. Credit reports are good for gauging how a potential applicant might behave on how they will pay the mortgage ongoing. Clients that apply who have kept a spotless credit record will endeavour to protect their spotless credit report by making sure payments are made on time every month, so this used with assessment  off income and affordability to underwrite the case so that the lending is as secure as possible .

From analysis of credit report’s over the years since they have existed its has been found that  clients that have poor credit ( that has not been caused by s sudden major event in their life) have got used to paying their credit poorly and might do so for any  new credit taken out in the future .

 For this reason many lenders especially standard high street lender will turn down applications with adverse credit showing on the applicant’s credit report. This has given rise to the formation of niche lenders that will lend to clients with varying degrees of adverse credit and this is usually reflected in the interest rate depending on how severe the adverse credit is, it will also have an effect on how much the lender will lend towards the property, the heavier the adverse the more deposit will be needed to secure the mortgage.

Lenders take the view that the more money the applicant has in the property that is from their own funds, the more chance they will pay the mortgage as they will have more of their own money at risk if the property was ever repossessed. A higher interest rate will cover the cost of any bad debt that is estimated to accrue from lending to applicants with adverse credit.

County court judgments

A County Court judgment (CCJ) is a court order which tells you to pay money you owe to a debt. It’s one of the actions your creditors can take as part of the debt collection process.

If you receive a county court claim form you have just over two weeks to respond. It’s very important to respond in the timeframe given, as if you don’t, the court could order you to pay the debt back at a rate you can’t afford. This could lead to further enforcement action.

You can only receive a CCJ in England or Wales.

Lenders will look at the date the CCJ was registered and how large it is, another factor will be if the CCJ is still outstanding or has been satisfied. If satisfied this will go in the applicants favour with select amounts of lenders.

A default

A default is usually registered on your credit report when a payment has reached a total of 8 payments missed, the company you owe the money to will issue a letter for default and register this on your credit report as a default, showing date registered and amount of the default. If you pay off the default it will show in the credit report as satisfied and date satisfied , lenders will base decisions on how new the default is, size of default and if it has been satisfied or not .

All adverse credit will come of your credit report after six years from the date it was registered.

 

 

 

Firstly lenders will base in the first instance the amount they will lend on the market rental figure that is usually established by the lender employed surveyor. But there are a lot of other factors that are looked at also depending on the specific lender.

Some lenders have a minimum income requirement; this is commonly set at £25,000 per applicant and is mandatory no matter how many existing buy to let the client has. This is often proven by 3 payslips P60 and bank statements showing the salary credit going into the account for employed applicants and for self employed, they will usually require 2 or 3 years SA302’S and tax overviews.

Due to buy to lets being un-regulated mortgage lenders have to be careful with their criteria, 99% of lenders require you to own 1 other property at the time of making the application and after the application has completed, this is to try and stop applicants trying to buy a property that is outside their current income and affordability limit as a buy to let and then living in the property after completion. It is possible to remortgage your home property on a buy to let basis if you want to move to another property to live in, 99% of lenders will insist that you complete the new purchase simultaneously with the let to buy remortgage, this is also to stop applicants remortgaging home property beyond what their income will allow them to remortgage it under income and affordability limits.

There are a handful of specialist lenders that will base the entire application without any minimum income requirements  but will insist you are an experienced landlord with at least 6 months landlord experience , this will mean you would have to have a property in your name you own and have rented out for at least 6 months . The lender will still require proof of income if you have an income this is often proven by 3 payslips P60 and bank statements showing the salary credit going into the account for employed applicants and for self employed, they will usually require 2 or 3 years SA302’S and tax overviews. The good thing is even if you earn nothing or a very small amount the lender will look at your application based on rental income.

Rental income calculator is now mostly dependant on being a lower rate tax payer or higher rate tax payer in the UK, this mostly equates to 125% of market rental income for lower rate tax payers and 145% for higher rate tax payers.

How to work out what you can borrow using these 2 common rental ratios.

125% lower rate tax payer.

Currently being used is a reversionary rate of 5% by lenders that they base the calculation on, but you would need to check with the lender what rate they are using currently for this.

Lower rate tax payer

Firstly you would need to work out the mortgage you think you will need £300,000 purchase price  minus standard 25% deposit for buy to lets =£225,000 mortgage needed then you multiply this by 5%=£11250 then you need to divide this by 12 to give you a monthly amount =£937.50 then you times this by the current lenders lower rate tax payer ratio 125% for this example =£1171.88 this is what the market rent needs to be , if it’s the same or higher than this you are good to go for the required mortgage amount , if it is lower you will need to put more deposit towards the purchase price to be able to buy the property .

For higher rate tax payers

Firstly you would need to work out the mortgage you think you will need £300,000 purchase price  minus standard 25% deposit for buy to lets =£225,000 mortgage needed then you multiply this by 5%=£11250 then you need to divide this by 12 to give you a monthly amount =£937.50 then you times this by the current lenders lower rate tax payer ratio 145% for this example =£1359.38  this is what the market rent needs to be , if it’s the same or higher than this you are good to go for the required mortgage amount , if it is lower you will need to put more deposit towards the purchase price to be able to buy the property .

You can see if you are a higher rate tax payer, you would need more rental income from property than as a lower rate tax payer.

Money Laundering and deposit for Mortgages

 

 

Where can my mortgage deposit come from?

“Where has your deposit come from?”. This question will and should always be asked by a mortgage advisor. This isn’t because we’re trying to be intrusive; it’s simply to start preparing your application. Advisors also have a duty to establish your deposit has come from a legitimate source. Every lender and solicitor will ask about your deposit source, so it’s important that mortgage brokers understand this from the outset.

Anti-money laundering regulation requires solicitors, lenders and advisors to ensure that mortgage deposits have not come from any illegal activity. It’s also important for lenders to assess your entire financial profile. Understanding how you’ve accumulated a mortgage deposit helps lenders to do this.

As all lenders vary in what they will and won’t accept, mortgage deposits are no different. Some lenders will accept gifted deposits with little fuss, whereas other lenders won’t. This is another reason why it’s vital for your mortgage advisor to understand your deposit source.

Knowing where your deposit has come from enables advisors to place your application with the right lender. It would be pointless in placing an application with a lender who simply doesn’t accept your deposit source.

Personal savings

Personal savings are the most common form of mortgage deposits in the UK. As deposits are saved in bank accounts, lenders can often calculate the increase in savings over a certain period of time. This helps lenders in assessing the legality of your income source. You will need to provide evidence of any income, such as bank statements, payslips or accounts if you’re self-employed.

Lenders will be satisfied if your mortgage deposit has come from your own personal savings. Even the strictest of lenders shouldn’t have any issues. On occasion, very strict lenders may probe further into your savings and how they’ve accumulated. This can involve requesting additional payslips, accounts or older bank statements.

Inheritance

Deposits from inheritance are typically accepted without any major issues. As long as there is a clear paper trail outlining that you’re the executor of the inheritance. Solicitor documents may also be requested from lenders to assess the inheritance in detail.

Gifted deposits

A gifted deposit is simply a deposit or part of a deposit that has been gifted to you. Gifted deposits are generally fine to use, however they do need to meet lender criteria. The majority of lenders will only accept gifts from documented family members. Even if your gift has come from stepfamily, it’s usually accepted.

If your gift has come from a friend or other source, then the majority of lenders won’t accept your mortgage application. That said, there are still a few lenders that may accept gifted deposits from non-family members.

Gifts from third parties are very hard to use as mortgage deposits. This is because of money laundering regulations and to minimise fraud. It isn’t impossible, but it is very difficult.

If you’re using a gifted mortgage deposit, then you will undergo comprehensive checks. Again, this is to minimise the risk of fraud and money laundering. On occasion, the individual gifting you the deposit may also undergo checks.

This is a brief guide to some of the mortgage criteria for mortgages in the current market part 1 credit reports.

 

 

This is a brief guide to some of the mortgage criteria for mortgages in the current market part 1 credit reports.

Mostly all mortgage underwriting by a lender will be firstly guided by your credit profile, so the first step before approaching a Broker or mortgage lender directly is to apply for a full credit report.

You have many choices when applying for a credit report, there are 3 main credit score, report suppliers in the UK that are used by lenders.

Experian

Equifax

Tran’s union (formerly Call credit)

Credit reports: what information is included?

 

Some of the information held in your credit report will come from banks, building societies and credit card companies you have borrowed from in the past, or that you currently owe money to. Other facts on your credit file may come from publicly available sources (such as the electoral register) or be supplied by utility companies.

 

 

What's included?

 

Your name, address and date of birth

 

Whether you are on the electoral roll at your current address

 

How much you currently owe lenders

Any late payments on existing or past credit card or loan accounts

Any missed payments on existing or past accounts

Any County Court Judgments (CCJs) made against you

Whether your home has been repossessed or you have moved away owing money

Whether you have been declared bankrupt or entered into an Individual Voluntary Arrangement (IVA).

 What's not included?

The amount of money in your current account

your salary

Savings accounts

Student loans

Criminal record

Medical history

 

Parking or driving fines

Council tax arrears

It is possible to dispute anything that you do not agree with on the credit report, if you really believe is an error, E.G things like incorrect name spelling, incorrect address details, missed payments that you don’t agree with, an incorrect default on the report etc. You can write to the relevant agency to dispute the entry if it is disputing something that is negatively impacting your credit profile sending proof of why it’s wrong would be needed for your claim to be successful . They will have 28 Days from your request, to tell you it has removed the entry or not, the entry on your file will be marked as disputed and resolved or not.

If the credit reference agency does not amend the file. It is possible to add what’s known as a 'notice of correction' (up to 200 words) to your file. This can be used to explain why you think a particular piece of information is wrong or to highlight any mitigating circumstances – for example, a sudden bereavement that may have caused you to miss a credit card or loan repayment.

There are many places you can get your credit report from these 3 agencies , there are a fair few of them that offer free access to the full report , for example https://www.moneysavingexpert.com/creditclub/ from this link you can access the full credit report from Experian for free . So it’s worth doing some searching on Google to find one that offers a free or one that offers a free trial for the initial first month for the agency you need the report from.

 

 

 

What mortgage lenders are looking for?

It is a myth that, all lenders are just looking for a good score, lending is mainly based on factors that should reflect in your score but often do not.

1.      Voter’s role information, do you show at the address on the report as per what is required as a minimum address declaration which is 3 years for most lenders.

2.      Is the name and date of birth on the report matching the name and date of birth on your ID passport, driving licence etc? If it’s doesn’t match it could cause problems applying for the relevant mortgage unless it is corrected as mentioned above on how to get it corrected.

3.      The payment profiles the zero, and numbers that show how many payments late you are on a credit item, if it shows all zero’s then it means you haven’t missed any payments as far as the credit report is concerned. High street lenders usually have a cut off for how many credit accounts you can have with missed payments, with some lenders having a zero tolerance for any missed payments.

4.      Defaults, usually once a credit account reaches 8 missed payments, it will show as a default, if you have a current default this could mean you are not acceptable to a vast amount of lenders and could require you to approach a lender that accepts adverse credit. If a default has been paid off then it will show as paid off on the report and will be looked on more favourably by the potential lender.

5.      County court Judgments, this is when the credit item has reached default and no acceptable arrangement has been made with the credit item provider and they have taken this matter to court, the court has then made a judgment that will appear on your file in the credit providers favour , this will usually , include the amount owed plus fees for the court and interest , it will vastly reduce your choices of lenders if you have a county court judgement , the more recent it is the harder it makes applications for a mortgage . Subprime lenders do have written criteria on what they will accept; this is when it would be advisable to approach a knowledgeable mortgage broker who would know what lender to try for you. It will make a difference if the county court judgement has been satisfied by paying it off, the report will reflect the date that this has happened.

To be continued part 2 income multipliers used by mortgage lenders.

 

 

What would happen if a buyer cannot complete, before the current Coronavirus stamp duty deadline.

 

 

This year’s stamp duty holiday for purchase up to £500k, that was introduced by the Chancellor to help invigorate the housing market after the first UK lockdown has been a great success and has actually caused a mini property boom. The issue currently is that it is time limited currently until March 2021. When Chancellor Rishi Sunak announced in July that no stamp duty would be payable on property purchases up to 500k, people who were not thinking about moving immediately decided to make the move sooner as it’s an offer that is too good to miss . Property investors who were on hold since the introduction of the additional 3% second property duty, now had the chance to buy and only pay the 3% second property duty but not the stamp duty due on a standard purchase up to 500k added to it . People who wanted to transfer a property into another person’s name could now do this up to 500k value duty free. 

This has caused a massive movement in the property market, but not without issues, some of the issues are listed below.

 1. Properties being purchase with a mortgage are being in a lot of cases delayed due to an increased amount off applications going into the lenders in such a short space of time , so queue’s to underwriters are forming with as much as 10 to 14 working days for a case to be even looked at for initial assessment . Then if the Underwriter looks at the case but needs more information back it goes into the queue for possibly another 10 to 14 days. 

2. Properties bought with a mortgage, after the first lockdown lenders have severely toughened underwriting criteria, especially for self employed people and definitely for self employed or employed for that matter in the Hospitality sector of the UK.

 3. The increased hunger for property has increased prices immediately and people are fighting over the same property in many circumstances, so savings on stamp duty are being eroded by increased demand and people are not even considering this until it gets near to completion.

 4. In the South East, many councils are being swamped by requests for searches, many councils are still operating with reduced staff numbers due to Covid 19 and searches are backing up to as long as 2 or 3 months in some councils, if the property is being bought by a mortgage waiting for a search is mandatory, at some stage this will push some buyers past the stamp duty deadline. So what happens if the purchase goes past the March 31st current deadline, then currently under the rules even if the purchase started before this date the normal stamp duty rates will apply, this has caused a lot of anxiety and calls for the holiday to be extended later into 2021, there are rumours that this could happen and be announced early next year but so far they are only rumours plus watch this space .