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Everything you need to know about mortgage lending criteria

Jun 21, 2021 by Alan Aksenenko

When it comes to buying a house, you will probably go ahead with the payment through a mortgage deal. Although a very helpful and valuable financial tool, which enables those who aren’t able to purchase a property outright to do so over a fixed term, it is not accessible to everyone. Indeed, there are quite a few mortgage lending criteria that could be relevant to your application and eligibility for a mortgage, depending on a number of factors including the size of the loan, your deposit savings, your age, the property value, your income and employment status as well as credit rating. Ultimately it is important to understand these criteria as a loanee, for you to be able to avoid shortfalls in applying for a mortgage, and hopefully getting the best possible deal.

Financial income for a mortgage

A man using a calculator and a paperpad

When evaluating whether you can afford a mortgage lenders will calculate your household income, which will usually be primarily comprised of your salary, and potentially any additional sources of income you may have that could include income from a second job, benefits, some sort of commission and more. This initial check ties into a much more significant and critical look into a prospective clients’ affordability. Here, a lender will wade through as much financial data and records about you as possible, including your household bills, additional expenses such as holidays, socialising, childcare expenses, spending habits, any existing or outstanding debts, and use that to calculate whether you will be able to cover the mortgage with whatever income money you are left with. Criteria as to your income and outgoings will vary on a case to case basis and depending on the lender, however these are very important to consider if you are thinking of applying for a mortgage.

Mortgage stress tests

Further to this, the lender will carry out what is known in the industry as a stress test, to ascertain whether or to what extent you would still be able to pay off the mortgage in case of some sort of foreseeable but not necessarily imminent situation such as retirement, maternity leave, having interest rates increase. Additionally, a credit check will be requested from one of the key reference agencies that appraise your financial situation, stability, and most importantly – ability to pay the mortgage, and try to estimate how risky you would be to loan to. It is in the lenders greatest interest to assess your financial position and make reasonably sure that you will not miss out on your loan repayments in the future. 

Getting your documents in order

A picture of a man searching through the documents

In relation to the credit checks, make sure that all the information being assessed and looked at is correct, so as to boost your credit score, which you can find out more about here. You will also need a number of documents for the mortgage application, without which your application will not go ahead. These include utility bills, proof of receipt of benefits (if relevant), a P60 form from your employer, payslips from your last 3 months, some form of identification, bank statements for the last 3 to 6 months as well as up to 3 years of your account history. It is important that you provide all the specified information accurately otherwise this could undermine your eligibility for a mortgage loan. 

Eligibility

In addition to the factors listed above the lender will look at a few more criteria in assessing the feasibility of your loan repayment and thus your eligibility for a mortgage, contingent on the loanee matching and fitting within specified financial boundaries to get a mortgage. This will include the deposit you are putting down for a property initially, and the greater the deposit you provide, the lower the risk for the lender, thus a larger deposit will increase the likelihood of your mortgage application not only being accepted, but also given a lower interest rate. Touched upon above shortly, retirement and age are other looked at criteria for your mortgage application. If you are for instance close to retirement age you could be limited to a short-term mortgage and would often also require a larger deposit. The mortgage term itself is another important criterion, as often times a shorter mortgage term will mean a higher monthly payment, and thus the term of your mortgage could be deliberately extended so as to lower the monthly instalments, making the payment of the loan more likely. Finally, one of the other factors that mortgage lenders will often look at is whether you are applying as an individual or couple for a mortgage. Applying for a joint mortgage could enable you to borrow a greater amount as the source of income will have increased as there would be two contributors. Thus, it can be seen that lending criteria if applying as a couple could be less stringent and subject to better rates. 

Summary

All in all, a myriad of criteria that are relevant to a mortgage application that will directly affect the type of mortgage you get, if you do match the relevant criteria in the first place. In knowing and understanding these factors you will be able to ready yourself to successfully apply for a mortgage!

Mortgages
Jun 21, 2021 by Alan Aksenenko

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