Want to know more about how lenders decide who will be eligible for a mortgage and how much an applicant can borrow? Darren Polson unravels the mysteries behind lending criteria
For pretty much all of you who are beginning the search for a new home – or even a first home of your own – it’s highly likely you will require a mortgage.
And the biggest, and possibly first question you will ask yourself is how much will I be able to borrow?
Arguably it’s the most important question and the one which will, ultimately, allow you to realise your dream.
So, how will you know how much will lenders be prepared to lend you? What do you need to know? What do they need to know?
This is where lending criteria comes into play…
There’s a good chance you’ve probably heard of this term lending criteria. For some, it might immediately bring on the sweats, with all sorts of concerns about what information a lender might need.
But it need not be daunting if you know what it is and why it exists.
What exactly is lending criteria and why do lenders use it?
In short, it’s what lenders use to decide the level of risk they might be taking in lending money and indeed how much they should lend.
Of course, it’s sensible for lenders to measure risk as it does no one any good, neither lender nor borrower, for loans of this size to be issued if borrowers cannot afford it or it causes them financial hardship.
Now most of us tend to consider ourselves a pretty good risk, and in fact we may already be or have been a borrower at some point. We may have had a loan for a car for example.
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.
What’s more the repayment time will most likely run 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.
What types of criteria do lenders use when deciding whether to lend?
They will use a range of factors to determine their lending decision and each lender will have their own specific terms and conditions for a mortgage application.
Most lenders will have a minimum set criteria and there will be various pieces 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
Another area to remember is residency – all lenders will have specific criteria for non-UK nationals.
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.
Furthermore, it’s important to be aware that even if you are not successful in one application that is not the end of the story.
Will rising mortgage rates impact criteria?
Now you may have seen the headlines regarding rising mortgage rates and this has indeed had an impact on the mortgage and housing markets.
However, there are still many mortgage deals to be had and as such checks on criteria and affordability still occur and are very important.
And this is where the advice and guidance of an independent mortgage broker is vital.
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
