For most of us who are buying a home, especially those who are doing so for the first time, it’s the $64,000 question – how much will I be able to borrow?
Arguably it’s the most important question – the one that will, ultimately, allow you to realise your dream.
So, to the crux of it – how will I know how much will lenders be prepared to lend me? What do I need to know? What do they need to know?
All of this comes under the category of what lenders call lending criteria – in other words, how do lenders decide if you’re a good risk, and if so, how much should they lend you.
What makes a borrower ‘risky’?
Now we all probably think we’re a pretty good risk and many of us have already had a loan for one reason or another, for example buying a car.
But borrowing to buy a house is a very different proposition, not least the amount you wish to borrow is going to be substantial figure and the repayment time will likely be over a long period, typically around 25 years.
Lenders essentially want to achieve two key things when agreeing to lend – of course they want to ensure they are repaid but also that they are not placing borrowers under unnecessary financial pressure.
They will use a number of factors to determine their final decision and each lender will have their own specific terms and conditions for a mortgage application.
What are the basic criteria common to all lenders?
Most lenders will have a minimum set criteria; there will be various bits of information they will need to examine and verify such as:
Income / Employment
You will need to show payslips, bank statements and/or HM Revenue & Customs (if self-employed) documents to confirm your income
Affordability
You will be asked to confirm your income and outgoings as a mortgage will not be agreed if you cannot afford it or keep up the payments. It’s also important to think about your financial commitments, and consider what effect future interest rate rises could have on your finances
Age
You must be at least 18 years old to apply. Only your retirement income will be considered if you want your mortgage to go past your planned or state retirement age – this is dependent on the lender and lending into retirement rules will impact this
Credit History
When you apply for your mortgage, the lender will conduct a credit search showing information held about you and your financial arrangements. This may impact your ability to secure a mortgage or impact the rates offered if you have had missed payments, defaults, CCJ’s or any other credit issue in the past. There are lenders on the market who support clients in this position
Property
The property you are purchasing or remortgaging will also be subject to checks and potentially a physical valuation, this is where the lender will check the re-saleability and condition of the property to ensure it is suitable to lend on
Residency
Another area to remember is residency – all lenders will have specific criteria for non-UK nationals.
What if I don’t fulfil the criteria for a mortgage?
It is important to note that, whilst all lenders will have these basic factors they will look at, they are not all the same.
Some will specialise in particular types of property or might have a geographical focus. Some lenders may also have expertise in lending to different types of borrowers, such as those who are self-employed.
So it should come as a source of comfort to know that even if you are not successful in one application that is not the end of the story.
There are lots of lenders and thousands of mortgage deals on the market and this is where an independent mortgage broker is worth their weight in gold.
A good broker can not only examine all the different deals but they also monitor the market constantly to ensure you have access to the latest offers.
They also work with lenders on a daily basis – they have established relationships and have a very good understanding of what lenders are looking for.
Applying for and securing a mortgage can be a complex business and having an expert to support you and help navigate the mortgage process can save you a whole lot of stress and money.
Darren Polson is head of mortgage operations at Aberdein Considine
