Tips for a `problem borrower'

What do you do if no one will risk you a mortgage? Don't despair, says John Andrew, there are still plenty of options

There is a lot of cherry-picking going on in the High Street and it has nothing to do with buying fruit. While many people's purchase of their dream home becomes reality, a growing proportion are entering a nightmare situation when applications for a mortgage are turned down by every lender they approach.

The advice from the Council of Mortgage Lenders, the industry trade body, is simple: ask the reason why you have been turned down before beginning the process again.

The reason given may be quite straightforward. Perhaps the valuation of the property is less than its sale price or your budget might be stretched by the repayments. If you are on a fixed contract of employment, there may be concern about your future ability to service the loan. On the other hand, inadequate proof of your income could be the reason.

In such cases, you should be able to persuade the same lender, or another, to grant you a mortgage. A request for a reduced sum could satisfy valuation concerns, or worries about your finances being stretched. Similarly, confirmation from your employer that your work contract will be renewed could allay fears about meeting future repayments.

The irony of being turned down is that it could influence another lender's decision to grant a mortgage. This is because credit reference agencies keep on file details about past searches for a year. Inquirers are only told about the type of organisation which made the search, but one does not have to be a detective to deduce the reason why credit was sought if the searcher was a building society.

There is no denying that there is fierce competition for mortgage business. However, lenders prefer "status" clients - people who have a regular income and an unblemished credit record. By contrast, the number of those who do not quite fit the "perfect" borrower profile has increased.

Take the self-employed. They may be "portfolio people" who earn their living by freelance work as well as working regularly a few days a week for a former employee. The chances are that while a single year's accounts are available, they cannot produce the set of three years' figures traditionally requested by High Street lenders.

Even if the required audited accounts can be produced, these may not impress a lender. A good accountant will draw up tax-efficient accounts to minimise their client's liability to the Inland Revenue. The result can be an income stream which appears to fluctuate, or which seems inadequate to meet the repayments on a garden shed, yet alone a home.

The recession has also left its mark. Possibly a business venture went through a "bad patch". Despite the fact that the applicant is now financially stable, an adverse credit rating could still remain. Every lender makes a search at a credit reference agency. County Court judgments remain on file until the end of the sixth year after the judgment was made, even when debts are paid, which mars the personal credit rating.

The judgment may not have related to credit at all, but to a dispute about goods supplied. If asked, most agencies will place a notice on file if the judgment did not relate to a bad debt. It is also not unknown for an agency to make an error. If a lender gives an adverse agency report as the reason for declining credit, get a copy of your file from the agency and ask for any errors to be corrected.

The changing profile of applicants for credit has also been taking place in the States. There it is now recognised that people who fail to satisfy proof of income, or have had "blips in the past", can be good credit risks. Until that happens, what should people who have been turned down for a mortgage do?

Mortgage brokers will introduce those who have been unsuccessfully seeking a mortgage to a lender, for a fee. Beware: it is not unknown for the charge to be up to pounds 5,000 and the subsequent mortgage to be at the outrageous rate of 16-18 per cent.

However desperate your situation, do not be tempted, as there are specialists who concentrate on niche mortgage business. For example, Riverside Associates is one of the largest of around a dozen organisations which assists people who do not meet traditional lenders' criteria. Known as "packagers", they fairly assess their client's situation and, if appropriate, prepare a package including all references, budgets and the valuation of the property and put their client's case to one of a specialist panel of lenders.

For this they charge an administration fee of pounds 58.75 and aim to get a fairly priced mortgage. The rate will be higher than for a "status" borrower. Niche mortgage providers tend to charge a margin over Libor (London Inter- Bank Offer Rate). The margin increases with their assessment of the risk and typically is in the 3 to 5.5 per cent range. Overnight Libor rates are currently 6.875 per cent. If the borrower's profile changes, there is nothing to stop a switch to a traditional lender to benefit from interest rates for "status" borrowers - currently about 8.2 per centn

Mortgage specialists can help put your past behind you

In 1992, Mark and Elizabeth took a fixed-rate mortgage with Nationwide. The following year their son was taken seriously ill and Elizabeth gave up her job to give him the 24-hour care he needed. The loss of her earnings put a strain on finances, so the couple immediately approached Nationwide and agreed a reduced monthly payment. Unfortunately they also fell behind with a personal loan.

However, thanks to Mark's promotion at the company where he has worked for 18 years, he received a substantial salary increase. The following year they managed to pay back all the money they were in arrears. Last year their finances were sufficiently improved to contemplate moving nearer Elizabeth's family. Matters moved quicker than they thought; they had a good offer for their house and they were offered a substantial discount on the bungalow they had seen - providing they could complete within a month.

Mark's salary was now double its 1992 level, they could provide a 25 per cent deposit and their financial difficulties were behind them, so they envisaged no problems when they approached the Nationwide for an extra pounds 26,000. Because of their past blip, however, the society was not prepared to advance any more. Mark even wrote to the chief executive to plead his case, but to no avail.

The Woolwich also did not want to know, while Barclays, the couple's bankers for 20 years, needed three weeks to consider their application for a mortgage. In desperation, Mark visited an independent financial adviser who sent him to the Kensington Mortgage Company, specialists in non-status mortgages. The finance was arranged in time.

As the couple's past problems were considered low risk by Kensington, they are paying 3 per cent over Libor. This will be reduced to a 2 per cent margin when the first year's payments have been successfully completed and to 1 per cent at the end of the third year. Not surprisingly, both Mark and Elizabeth are upset that neither their building society nor their bankers were prepared to help because of a past temporary problem. The Nationwide also charged them pounds 2,500 for the early repayment of their mortgage. Their son still needs 24-hour care, but is comfortablen

Where to find out more ...

Riverside Associates is a mortgage packager based in Liverpool. Tel: 0990 133 470.

Kensington Mortgage Company specialises in all non-status mortgages. It only deals with clients via independent financial advisers to whom a commission is paid. For more information, Tel: 0345 99 66 99.

The Mortgage Business specialises in mortgages for the self-employed and clients who have difficulties certifying their income. Tel: 0345 253 253.

John Andrew