What criteria should a buyer pass to obtain a mortgage
Obtaining a mortgage can be a stressful and anxious time for house buyer’s especially first time buyers who have never been through the process. More than ever lenders are asking the potential buyer a large amount of questions to ensure the applicant is able to afford the mortgage they are applying for. The applicant will have to provide the lender a number of documents i.e. bank statements, wage slips. Therefore if you approach a lender or appoint a mortgage broker before you decide on the house you will know whether or not you are able to purchase the property. Until you prove this the estate agent should not remove the property from the market. The agent should ask for a document called an agreement in principle. This document illustrates that the lender is willing to lend you the money.
Please see below a summary on what a lender will look at when deciding whether or not a mortgage is affordable.
Household expenses and salary
All lenders look and treat income differently. A basic salary is generally looked at the same but lenders will have their own approach towards things such as bonuses, overtime and commission. The reasons why, are lenders see this as not guaranteed income. Some borrowers will take all of the extra income into consideration, some will allow a percentage and some won’t look at any of the payments.
The lender will also want to know all the fixed household costs. For example, any insurances you have, current gas and electric bills, weekly food bill. Some lenders will also want to know how many dependants you have as each lender has a figure in their head on how much it costs to clothe, feed and water a child. They will also want to know about any other debts such as a car loan. To make the application process as dynamic as possible it may be a good idea to take the following documentation to your appointment with the lender or mortgage broker.
- Your most recent payslips and up to date P60 which is issued by the Inland Revenue every year. This illustrates how much money you made for that year. If you get paid monthly we recommend taking the last three, if your paid weekly maybe 6 wage slips over a 3 month period.
- The most recent account statement showing the amount of any dividend and interest income you received during the past two years. Your most recent SA302, again this is a document from the Inland Revenue that clarifies income made after tax and any dividends you have received.
Moving from job to job every 6 months will make the lender slightly nervous. The borrower will definitely look for job stability. Whilst they understand people change jobs for a number of reasons holding 1 job for a large period of time is very important. If you can demonstrate you have moved jobs to better yourself and your family you will not have an issue.
- Print off your last 3 month bank statements, also any savings accounts you may have;
- Any share certificates you have and their current value;
- Face amount and cash value of life insurance policies;
- Details of any other properties or land you own;
- The balances and account numbers of your current loans and debts, including car loans, credit card balances and any other loans you may have
We do suggest considering using a mortgage broker as they will know exactly what the lender will require.
What will the lender do with all the documentation the buyer submits?
Once the lender has collated the necessary information it will be passed to the underwriter to assess your full application. There is no strict rule as to how long the underwriter will take before making a decision all lenders work to different timescales. Some lenders have a computer system which underwrites the case for them others will have a pair of eyes or even two looking at every bit of documentation. Just because the lender has issued you an agreement in principle does not guarantee your full application will be approved. Converting the AIP to a full application is mainly to evaluate the borrower’s ability to pay the monthly payments the ability to pay their existing credit commitments and the property itself.
What will the lender look for when investigating the property to be mortgaged?
- The main thing the underwriter must decide is, how accurate is the agreed purchase price compared to their thoughts on the actual value. The lender will generally appoint a surveyor to inspect the property on their behalf to answer this question. A mortgage offer will not be issued to the borrower until a mortgage valuation has been carried out on the property. If the surveyor does not think it is worth the purchase price the lender will not lend the full amount.
- Is the property an acceptable style and type to them? For example, if the property built from a standard construction? If not what is the construction and what are the risks to the lender of granting a mortgage on a non-standard constructed property? Again the surveyor who composes the mortgage valuation should be able to answer these questions for the lender.
It’s because of the strict approach by the lenders that a number of sellers are insisting their homebuyer is a cash purchaser. Although this may take longer to find or you may need to reduce your asking price slightly the chances of your sale falling through are minimal compared to accepting an offer from a buyer who is reliant on a mortgage. There are even companies that offer to buy any house for sellers to approach.