Most people try to figure whether or not they can handle their monthly payments when applying for a mortgage. Sure, your lender will take a look at the income and expenditures, but the truth is there are more things to take in consideration. Plus, how do you know how much money you might be given? Here is how lenders assess your situation to make a decision.
How lenders see things when they assess your case
Years ago, lenders would make decisions on nothing but your income. The loan to income ratio used to vary. For instance, if your annual income is £20,000, lenders could give you three or four times more – up to £80,000. Obviously, some lenders provide different values, but most of them are capped to certain limits. If you buy a house with your partner, that number could double up.
Apart from the actual income, lenders will also keep an eye on the type of monthly payments you can make. They analyse your current income, as well as your expenses and lifestyle. Apart from the income to loan ratio, you will also have to consider the affordability assessment. The lender must ensure you can make repayments and your income is often irrelevant here.
If you make £3,000 a month and your car, other loans and lifestyle needs cost you £2,500, your mortgage will obviously be limited. Therefore, lenders take more aspects into consideration, such as having a baby, taking a career break and so on. If a lender believes you may not be able to make payments later on, they will reduce the amount of money you can borrow.
Your income includes various factors and apart from your wages, it may also be a pension or an investment. Child maintenance support from your previous partner will also be considered, not to mention other potential earnings – bonuses, overtime, a freelance job or others. Proving your income will involve using payslips and bank statements.
Things are a bit different for self-employed individuals, as they also need to provide business accounts and previous income tax details.
Your expenses are just as important. Current credit card repayments will be considered, as well as all the bills you have to pay and perhaps your rent. Maintenance payments, lifestyle expenses, other loans and agreements are just as important, not to mention insurances – car, pet, travel and so on.
You will also have to provide lifestyle figures, such as your expenses on recreation, childcare, social interaction, clothes and others.
You may not think too far ahead, but your lender will. You will pay your mortgage in 20 to 30 years, so potential changes should be taken into consideration as well. Interest rates could increase – what would you do in that case? What happens if you lose your job out of nowhere? What happens if you get injured and you are unable to work?
Other changes may be positive though – such as having a baby or perhaps taking a career break for half a year. It also helps if you do your homework upfront and consider such potential scenarios – it might be wise to save up and ensure you have enough money for up to half a year should an unexpected situation arise.
In the end, the way you see things when considering a mortgage is different from the way a lender looks at it. Understanding how the lender assesses such situations will help you make the most out of your application and increase your chance of getting accepted. While a lender will try to make this option as safe as possible for you, it is just as important to plan everything upfront as well, rather than rely on someone else.