Landlords would have to be living on Mars not to have realised that credit conditions have tightened considerably in recent months as a result of the ‘credit crunch’.
This has made finding a buy-to-let mortgage more difficult than ever for some landlords.
There are a couple of reasons why a landlord might not be able to obtain a buy-to-let mortgage to either purchase a new investment property or remortgage an existing buy-to-let property.
Where do professional landlords go for their buy-to-let insurance?
Unusual buy-to-let investment property
Finally, some landlords seek out non-standard buy-to-let investment properties such as, ex local authority, flying freehold properties, prefabricated construction properties, freehold flats, new flats, high rise flats, flats above shops, HMO, uninhabitable properties, or development properties. Whilst they can often be very good buy-to-let investments they can also be more difficult to find lenders that will provide a buy-to-let mortgage for these types of residential investments.
Non standard income details or stretched multiples
Many landlords don’t fall into standard income categories. For example an individual that works a 9-5, earns £50k in a rock steady job having worked for the same employer for 25 years.
A landlord may have just started a job or be self employed or have a limited employment history. In this case a landlord will find it more difficult to secure buy-to-let finance as lenders have tightened their lending criteria in recent months.
The other situation where landlords may face problems obtaining a buy-to-let mortgage is if they are proposing to borrow large amounts or where they seek to fund investments which are on stretched borrowing multiples. For instance, the former could be because their residential investment portfolio is very large say over £5 million, or a landlord has a large portfolio of buy-to-let properties for example over ten investment properties.
In other circumstances where a landlord investment multiples are stretched the mortgage broker can access buy-to-let lenders which are prepared to accept that the rental cover from a proposed buy-to-let investment is lower than standard. Traditionally lenders demand 125% of the mortgage payment to be covered by the actual or projected rent from a landlord’s investment property.
Getting good advice is essential
In both cases where a landlord has been declined by a lender, a landlord should seek advice from a good mortgage broker. This is because a buy-to-let mortgage broker will be able to search through their panel of lenders to find specialist lenders that; are able to lend on the type of property that a landlord is looking to purchase or will advance funds on more generous lending multiples. Landlords should ensure that they do not end up paying a penal interest rate for these buy-to-let mortgages.
Are you sub-prime?
The other reason why a landlord is likely to be refused a buy-to-let mortgage is because they may have a ‘less than perfect credit history’. This does not mean that the landlord has financial problems; in fact far from it. Frequently it may well be that a landlord or borrower has inadvertently received an incorrect or inaccurate entry on their credit file which unless corrected means that obtaining credit such as a buy-to-let mortgage is difficult or impossible.
Therefore, if a landlord is refused a buy-to-let mortgage they should enquire with their lender the reasons why they have been declined. Unfortunately many lenders are very reluctant to release this information fearing that unscrupulous borrowers will exploit the knowledge gained to fraudently obtain buy-to-let finance. This means that the only way a landlord can check whether their refusal of finance relates to their credit file is to request a copy from the appropriate credit referencing agency.
How to get a copy of your credit file
The process of obtaining a copy of a landlord credit file is actually pretty straightforward. If a landlord has been refused a buy-to-let mortgage, then they should ask the buy-to-let lender which credit reference agency was consulted and whether the credit reference agency's information was the reason for the decision. If this was the case a landlord can then contact this agency and ask for a copy of their credit file under the Data Protection Act 1998. This costs £2.00 by letter or over the internet and £2.50 by telephone. They will require the landlord’s full name, signature, current address, date of birth and any previous addresses that a landlord has lived at for the past 6 years. A landlord’s file should be sent to them within 7 working days. If the information is incorrect then you as the landlord have a right to ask the agency to remove or correct the information.
For how to contact each credit reference agency see below:
Consumer Help Service
PO Box 8000
Nottingham NG80 7WF
Tel: 0870 241 6212
(you can order your credit file on the internet or by telephone).
Credit File Advice Centre
PO Box 1140
Tel: 0870 010 0583
(you can order your credit file on the internet).
Consumer Services Team
PO Box 491
Tel: 0870 060 1414
(you can order your credit file on the internet).
The credit file will contain the following information:
Your personal credit history
1. Electoral roll - Details of whether you the landlord are on the electoral roll as some lenders require you to be on it before they can lend.
2. County Court Judgments (CCJs) - These arise when a debtor has taken you to court to enforce payment of a debt and the debtor won the case. The court holds this information for six years from the date of the judgment. They also record if you the landlord have subsequently paid the judgement.
3. Individual Voluntary Arrangements (IVAs) - This is where you the landlord have become bankrupt and unable to pay your debts. Once you have been made bankrupt and the debts have been settled then you as the landlord become a discharged bankrupt. Only once you the landlord have been discharged can you have any hope of obtaining credit again. You are automatically discharged after six years.
4. Credit accounts - These are all the landlord’s loan accounts that have been active in the last six years and whether you have ever defaulted on them. Typical accounts are your mortgage account, credit and store card accounts and personal loans.
5. Repossessions - Details of any house repossessions that have ever occurred.
6. Previous searches - These are previous credit searches by other lenders that you have made a credit application with.
7. Gone Away Information Network (GAIN) - This is where you the landlord have moved home and not forwarded on the new address and not satisfied the debt.
8. Credit Industry Fraud Avoidance System (CIFAS) - This is where the lender suspects fraud and attaches this information to the file. A landlord cannot be refused credit based on a suspicion.
A landlord’s credit file will dictate the mortgages that are available to a landlord. The key factors are CCJs or defaults. If you the landlord have any CCJs or defaults (points 2 & 4 above) you will be restricted to adverse credit lenders who charge higher arrangement fees and interest rates. If a landlord has an IVA, repossession or GAIN on their credit file it is unlikely you will get a buy-to-let mortgage but a landlord will still probably be able to obtain a residential mortgage depending on when you had your debt problems.
Mistakes or inaccuracies
If a landlord does discover inaccuracies or mistakes on their credit file, this could be a reason that a landlord was declined a buy-to-let mortgage. In this case they need to ensure that their credit file is amended. This is a relatively easy process and a landlord should contact the relevant credit agency and ask for the correction. A landlord can also ask the credit reference agency to put a notice on their file of up to 200 words explaining why they have got into debt or why they think the information on their file is misleading. You as the landlord may want to explain your financial circumstances at the time and why your situation is now different. This notice will then be seen by anyone reading a landlord’s credit file such as a buy-to-let lender doing a search of your credit file when a landlord applies for a buy-to-let mortgage.
Most credit decisions are made automatically by a computer. If there is a notice of correction on a landlord’s file, their buy-to-let application must be referred for a manual decision (i.e. a buy-to-let mortgage underwriter will decide whether or not you can get credit).
Sub prime mortgage
Even if a landlord does not have a perfect credit history it may well be that they can still access a buy-to-let mortgage. These mortgages are getting more difficult to obtain though because of the credit crunch. Moneyfacts recently reported that in July, there were 1,383 sub-prime buy-to-let deals available but by early December the figure had shrunk to 149. Using a good mortgage broker is vital to access a sub-prime mortgage as generally they will not be available to a landlord direct.
Landlords – take note
Credit reference agencies are becoming more and more sophisticated. They log every bit of information that a landlord puts in every buy-to-let mortgage application and if a landlord submits an application that was slightly different from a previous application they will ‘flag it up’. A landlord should remember therefore when filling out their buy-to-let application form - do not lie! If a buy-to-let lender finds out they will demand repayment in full and they could inform the police of fraud - the charge being obtaining finance by deception.