In this brief guide, we are going to answer the question “Can you get a mortgage with outstanding debt?”.

Getting a mortgage with outstanding debt may be difficult if you have other factors which affect your mortgage affordability such as bad credit, a small mortgage deposit and buying a non-standard construction house.

If you are looking to get a mortgage with outstanding debt such as payday loan debt, credit card debt, loan debt etc then you may naturally be concerned with how this may affect your ability to get a mortgage.

There are mortgage lenders that may be willing to lend to you but you can expect to be required to put down a bigger mortgage deposit and have good credit in some cases.

There may also be mortgage lenders who specialise in mortgages with outstanding debts and these mortgage lenders may be more suited to you. A specialist mortgage broker may be able to help you by searching the mortgage marked and advising you on these mortgage lenders.

Can you get a mortgage with outstanding debt?

Yes, you can get a mortgage with outstanding debt but this may reduce the number of mortgage lenders who are willing to lend to you and could potentially reduce the maximum amount you may be able to borrow.

When checking to see if you can afford a mortgage, the mortgage lender will look to see how much debts you have, the type of debts you have and if these debts affect your monthly disposable income. 

If your monthly disposable income does not cover your monthly mortgage repayments then you may struggle to find a mortgage lender who is willing to lend to you.

The mortgage lenders criteria

Aside from your own circumstances, most mortgage lenders have strict lending criteria on how much debt to income ration they will accept for a particular mortgage and this could greatly influence the number of mortgage lenders which you have available to you.

Your income

The amount of annual income you have will also play a big part in if you will be able to get a  mortgage with outstanding debt.

If you have enough income and enough disposable income then getting a mortgage with outstanding debt may not be as hard than if you didn’t.

Your credit score

Your credit score will play a big factor in deciding if you are able to get a mortgage with outstanding debt.

If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.

Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.

Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.

If you have bad credit such as the below then getting a mortgage with outstanding debt may be much harder.

Bad credit could include:

  • County court judgement
  • Default
  • Bankruptcy
  • Debt management plan
  • payday loans
  • Individual voluntary arrangements
  • Missed credit repayments
  • Credit arrears

The type of property

The type of property you are trying to buy could also greatly influence if you are able to get a mortgage with outstanding debt. If you are trying to buy a non-standard construction property then you could potentially find it much harder to get a mortgage with outstanding debt.

The type of debt

The type of outstanding debt you have could also play a big role in if a mortgage lender is willing to offer you a  mortgage. If the outstanding debt is a secured debt then some mortgage lenders may be more reluctant to offer you a mortgage as defaulting on a secured debt could mean you end up losing your assets.

Your mortgage deposit

The size of your mortgage deposit is also a big factor which most mortgage lenders may consider when deciding if to offer you a mortgage with outstanding debt.

Some mortgage lenders may require a much bigger mortgage deposit and this will help reduce the mortgage lenders risk on the mortgage by reducing their loan to value.

You could potentially increase your mortgage deposit by using a government scheme.

In some cases, these first-time buyer government schemes will reduce the amount of the property price and thereby increasing the amount of mortgage deposit you have in relation to the property value.

These schemes include:

Lifetime ISA– gives you a government bonus of £1,000 if you save the maximum £4,000 a year.

Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.

Help to buy equity loan- gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.

Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.

Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.

Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.

Right to buy– allows you to buy your home at a discount price.

Preserved right to buy- same as above.

Right to acquire- same as above.

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

You could also get a gifted deposit, a family deposit mortgage or a guarantor mortgage which may increase your mortgage affordability.

What is a debt to income ratio?

A debt to income ratio is your debt in comparison to your gross monthly income.

To work out your debt to income ratio you must add up all your monthly debt repayments and divide this by your monthly gross income.

You must remember to include all your monthly debts including:

  • Personal loans
  • Credit cards
  • Homeowner loans

Mortgage lenders use the debt to income ratio to calculate if you have too much debt. Each mortgage lender may have their own debt to income ratio figure which they will accept anything below.

Most mortgage lenders will view your debt to income ratio as a percentage rather than a ratio. 

To replicate this simply multiply the figure obtained by dividing your monthly debts with your monthly gross income by 100.

Some mortgage lenders will also include your new proposed monthly mortgage repayments in your debt to income ratio calculations in order to see what your debt to income ratio will be once you have obtained a mortgage with them.

If this figure is too high then the mortgage lender may not offer you a mortgage.

The lower your debt to income figure is, the more likely you are to get a mortgage.

If you are unsure on how to calculate your debt to income ratio then a mortgage broker may be able to help you do this.

How to get a mortgage with outstanding debt?

If you have outstanding debt then you may want to follow this process in order to get a mortgage with outstanding debt:

  • Calculate your debt to income ratio
  • Analyse which debts can be paid off
  • Get your credit score
  • Speak to a mortgage broker
  • Get a mortgage in principle
  • Get a mortgage offer

To get a mortgage with outstanding debt you should first calculate your debt to income ratio.

This will allow you to know if you need to work towards reducing your current debts as they are too high or if you can go straight to applying for a mortgage.

You should then look to get your credit score to ensure the information on your credit score is correct and you have not missed any credit repayments which could potentially have damaged your credit profile.

Once you are confident that you are ready to apply for a mortgage you may want to consider speaking to a mortgage broker.

Using a mortgage broker

You may want to consider using an independent mortgage broker to get a mortgage.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month.

It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.

FAQs: Can you get a mortgage with outstanding debt

Some of the most frequently asked questions about getting a mortgage with outstanding debt.

Should you clear your debts before applying for a mortgage?

Some financial experts may recommend that you clear your debts before applying for a mortgage but whether you decide to do this or not will heavily depend on how much benefit will be gained from this and how the capital used to clear your debts may affect your mortgage deposit and any subsequent saving you may have gained from being on a better mortgage rate due to putting down a much higher mortgage deposit.

Speak to a mortgage broker who can analyse the opportunity cost of this and let you know.

How long after clearing debt can I get a mortgage?

You can get a mortgage very shortly after clearing a debt as long as this is reflected on your credit report.  You should check your credit report with tools such as checkmyfile to ensure it has been reflected on all credit reports that you have indeed cleared your debt.

If you pay off your debts, then qualify for an FHA loan, you’ll need a much smaller down payment. The credit score requirements are also lower than for a conventional mortgage. You do have to show a history of paying bills on time, as well as three years of steady income.

How much debt is acceptable for a mortgage?

Different mortgage lenders have different requirements on how much debt they may accept for a mortgage. You may want to inquire with the mortgage lender or an experienced mortgage broker before applying for a mortgage with outstanding debt.

Will my debt affect my mortgage application?

A debt may affect your mortgage application but this is dependant on what type of debt you have and how much debt you have. It will also depend on how much of your mortgage disposable income you have after you have paid off your debts each month and if this is sufficient enough to afford a mortgage.

How far back do Mortgage Lenders look at credit history?

Your credit report will display as much as 6 years worth of credit history and it is fair to say that most mortgage lenders will look at 6 months worth of credit history but this doesn’t necessarily mean that they will take all of this into consideration when assessing your mortgage affordability.

Do mortgage lenders look at credit card debt?

Yes, mortgage lenders look at credit card debt when assessing your mortgage affordability.

In this brief guide, we answered the question “Can you get a mortgage with outstanding debt?”.

If you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.