You would think that after contracts have been exchanged you’re home and dry with your property purchase. You have your mortgage offer and and you’re getting ready to move.
But can a mortgage be declined after exchange of contracts? Whilst uncommon, a mortgage can be declined after exchange of contracts, which may prove to be quite costly if it means you fail to complete the purchase on time. This is because you are legally obliged to complete, and if you don’t you may lose your deposit and be liable to damages too.
It’s so important you have everything in place before contracts after exchanged. This is because if you don’t complete after exchange, you’re not only likely to lose your deposit, but also the purchase of the house. If you are also selling your house, you may be in breach of this contract too.
A declined mortgage could affect the whole conveyancing chain. This is why your solicitor is responsible for making sure everything is in place before contracts are exchanged.
What can cause a mortgage to be declined after exchange of contracts?
There are a number of reasons that could result in your mortgage being declined. These include:
- Something material or important wasn’t declared on your mortgage application.
- Adverse credit appears on your credit report after exchange.
- The lenders lending criteria changes after contracts are exchanged.
- The lender reassesses your finances and since exchange these have adversely changed.
- The lender discovers that the person has been involved in criminal activity or has been convicted of a serious criminal offence that wasn’t known before.
- Completion gets delayed beyond the deadline given when the mortgage offer was made.
- The lender has their permission to lend withdrawn by their regulator.
Let’s take a look at each of these in more detail.
1. Something material or important wasn’t declared on your mortgage application
It’s extremely important you are totally honest when you complete your mortgage application. If you omit to tell the lender something that’s important, or if you lie on the application form you are in break of your mortgage before you begin and this could be classed as fraud.
If the lender finds out about your omission or a less than honest application, the lender would be quite within their rights to withdraw their mortgage offer.
2. Adverse credit appears on your credit report after exchange
There’s nothing to stop your mortgage lender from running a secondary credit check after exchange. If they do and your credit report has adversely changed, the lender may decide to withdraw their lending.
It’s true to say you should look after your credit rating at all times. But be particularly careful between exchange and completion. Otherwise you could be in for a nasty surprise.
3. The lenders lending criteria changes after contracts are exchanged
A lenders criteria for lending can and does change. This can happen if the lender concerned decides they are no longer prepared to lend on the type of property you are buying.
This would be unlikely to happen on most types of house in a normal location. But it’s possible that a lender may change their mind about lending on a house that’s on a floodplain or next to electricity pylons.
Therefore, be careful where you choose to buy a property, as location is important for many reasons, not just for resale reasons.
4. The lender reassesses your finances and since exchange these have adversely changed
Within the mortgage terms a lender is quite within their rights to reassess your finances. In more challenging times people lose jobs which can happen during a recession. Or at a time during a pandemic, which in this case could be Coronavirus-Covid-19.
During difficult times lenders become more cautious and they are more likely to carry out further checks. This can include to confirm your financial position hasn’t changed since the original mortgage application.
Lost job after exchange of contracts
If you have lost your job after exchange of contracts this is a material change in your financial circumstances and is likely to lead to a withdrawal of your mortgage.
If you use a broker you should discuss your situation with them first before letting the lender know, but ultimately you should probably let them know.
Other lending or loans to buy a car or other items is taken out between exchange and completion
Also be very careful about taking out any further loans or bank finance after getting your mortgage offer. If the lender reassesses you affordability with the new lending in place, the may decline the mortgage offer based on this nw information.
So don’t buy and new cars on finance or furniture on credit until after you’ve completed the purchase. But in any event make sure before you take on any new finance you can afford the repayments.
5. The lender discovers that the person has been involved in criminal activity or has been convicted of a serious criminal offence that wasn’t known before
If you have a criminal record you must disclose this fact at the point of applying for the mortgage. Depending on the crime and how recent it was, you may have your mortgage declined.
However, if you have a criminal record and you fail to disclose this fact and the mortgage company find out, they may well decline your mortgage. This could be found out after contracts have been exchanged.
6. Completion gets delayed beyond the deadline given when the mortgage offer was made
All mortgage offers come with a deadline by which the mortgage needs to be drawn down. If the date of completion goes beyond this date, the mortgage may get withdrawn before completion.
It’s extremely important to know the date the mortgage offer runs out and therefore to arrange exchange and completion accordingly.
7. The lender has their permission to lend withdrawn by their regulator
In the unlikely event your lender has their permission to lend withdraw by the regulator, they will have no alternative but to decline the mortgage. Whilst a number of banks went out of business back in 2008, this happened during a set of unusual circumstances.
What to do if mortgage is declined after exchange of contracts
The best thing you can do if your mortgage is declined after exchange of contracts is to seek alternative finance. Don’t panic and get your solicitor to speak with the sellers solicitor about the problem to see if they are happy for a delay in completion.
You will need to act very fast. My suggestion is if you don’t already have a mortgage broker, is to get one now. A mortgage broker will know the mortgage market and are better able to match your circumstances with the lending required.
It will take too long for you to try other banks to find one that will lend. Depending on the length of time between when the mortgage is declined and the date of completion, will dictate how much time you have to find another mortgage.
However, it’s unlikely you’ll be able to get another mortgage if it was declined due to you lying on the application form, for other fraudulent reasons or from criminal activity.
Also, depending on the reason your mortgage was declined, this may limit what other mortgages you can now apply for.
This might result in having to accept a mortgage on less favourable terms to the one that was declined. For example, you may have to accept a higher interest rate or a different loan to value amount.
However, this couldn’t be as bad as losing your house purchase and your deposit.
How to avoid a mortgage being declined after exchange of contracts
- Keep the period between exchange and completion short. The shorter the time period between exchange and completion, the lower the risk.
- Make sure to be honest when you apply for the mortgage. It’s so important that you are totally honest when you apply for your mortgage. If you don’t you are risking the lender finding out and withdrawing their lending.
- Be careful when selecting the type of house and it’s location. For example, houses that are close to a flood plain or close to pylons could be the type of house that might be more at risk.
Do you have recourse with the lender if they decline your mortgage after exchange?
It’s very unlikely you would have recourse to the lender if they withdraw their mortgage after exchange of contracts. It perhaps wouldn’t harm to speak with the lender if you receive a letter of withdrawal.
It might be a mistake has happened and there’s an error in the information they have. Mistakes happen, so you are better to check whether the mortgage withdrawal is valid.
Lender checks after exchange and do mortgage lenders do final checks before completion
The type of checks that lenders can and do make after exchange but before completion include:
- A secondary credit check.
- An employment status check.
- A bankruptcy check.
- Check the expiry date on the mortgage offer.
- Check the bank’s lending criteria.
I hope this article has helped about can a mortgage be declined after exchange
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