To determine whether you are eligible for a mortgage, a mortgage lender will want to assess a number of different factors before giving their approval to lend to you. Taking out a mortgage generally involves borrowing a significant amount of money over a fairly long period of time. Lenders will want to look at the bigger picture of your personal situation and finances. This is to satisfy themselves that you will be able to afford this commitment.
To help with this assessment, lenders will have their own set of lending criteria. They will apply this to mortgage applications as a guide to determining their appetite to lend. As a borrower, you will generally need to meet these criteria to be eligible for a mortgage from them.
Every lender is slightly different, and each will have its own specific criteria and lending appetite. In this article, we will talk generally about the factors that you can expect a mortgage lender to look at when deciding whether to give you a mortgage and how you can improve your chances if you are struggling.
How do mortgage lenders assess affordability?
Before approving you for a loan, a mortgage lender will want to assess the ‘affordability’ of any proposed new mortgage borrowing to you. This process determines the strength of your finances and therefore your ability to pay back the borrowing you take out with them. With this in mind, one of the biggest factors they will consider is your income.
Lenders will be looking for evidence that you have a strong, secure source of income that can be relied upon for the term of your borrowing. To evidence this, they will be looking for confirmation that you are either in some form of permanent employment, have ongoing contracts, history of continuous work, or have self-employed income. They will ask you to provide a minimum of three to six months’ worth of recent payslips or evidence of other income. This can vary depending on how you receive your income.
If you are permanently employed, your wage slips should show that your income is relatively steady and consistent. These payslips will need to include:
- Your name
- Pay date
- Tax period
- Gross pay
- Net pay
- Any bonuses, overtime and/or commission
- Any additional allowances such as a car allowance, etc
Providing evidence of your income can be more difficult if you are self-employed as you probably won’t be able to provide payslips and your income may fluctuate more than someone who is directly employed.
Don’t worry though, there are a number of mortgage lenders willing to provide facilities to self-employed borrowers. Advisors, such as us here at Mortgage Light, have plenty of experience in sourcing self-employed mortgages for those that need them. The process usually just requires more financial evidence and some extra checks.
Lenders will generally also request to see 3-6 months’ worth of recent bank statements from your main current account. This is so that they can get an idea of your spending habits to determine how your current expenditure fits with your income. They will take the following into account:
- Outstanding loans
- Credit cards
- Household bills
- Insurance policies
- Child or spousal maintenance
- School fees
- Travel costs
It may be that you are showing signs of struggling to manage within your current budget. In this case, you will need to build a convincing case to explain how you will manage the additional cost of a new mortgage, should they grant you one.
Do mortgage lenders look at your credit rating?
All mortgage lenders will usually look at your credit rating. This is so that they can get an idea of your financial history and assess how much of a risk you might be. They will look at how regularly you keep up with any credit payments, and if you have ever missed any or had any arrears. They will also want to see if you have had any applications turned down by other lenders for similar facilities recently. This generally serves as a warning sign.
Before you approach a mortgage lender or mortgage advisor, it might be an idea to take a look at your own credit rating to see what it looks like. There are three main credit reference agencies in the UK – Experian, Equifax, and TransUnion. We recommend that you get a copy of your credit report and examine it carefully to make sure there is no incorrect adverse information recorded. If there is, contact the relevant company to get this corrected as soon as possible.
If you have a poor credit score, this does not necessarily mean that you won’t be eligible for a mortgage. It may, however, make the process more challenging. Any mortgage offer you do get is likely to be more expensive as a result. We recommend enlisting a qualified mortgage advisor and broker to help you if this is your situation.
At Mortgage Light, we regularly help customers with low credit scores find a mortgage. We know the best lenders to approach. Some lenders place great reliance on an individual’s credit score, but whatever yours is, there will be a lender that will consider your application or put you in a position where it will be possible in the future.
Do I need a house deposit?
Whilst it is possible to get a 100% mortgage without a deposit, this is very rare. In the vast majority of cases, you will need to have saved a deposit of at least 5% of the property cost to contribute to the purchase.
Your deposit goes towards the cost of the property that you are buying. The bigger the deposit that you have saved, the smaller the mortgage you will need. This ought to make you more likely to be approved for a mortgage. This is because the lender is taking less of the risk with a smaller loan. That being said, the main factor in the assessment should always be the affordability of the proposed borrowing to you.
What other factors affect my mortgage eligibility?
Alongside your income, expenditure, credit rating and your deposit, there are other factors that your lender may take into consideration when assessing your eligibility for a mortgage. These may include:
- The strength of your employment status and how long you have been in your job
- What are your longer-term employment prospects? How secure is the sector you work in?
- Your life stage – are there any life events on the horizon that might impact your financial situation? Are you likely to want to start a family soon, or are you approaching normal retirement age for example?
- Whether you have any dependents that rely on your income and is the cost of this likely to increase or decrease in the short to medium term?
What documents will I need to provide in order to prove eligibility for a mortgage?
This will depend on your individual circumstances and the lender in question. Generally, however, most lenders will want to see the same basic information. Here are the documents you can expect to be asked to provide in support of your mortgage application:
- Photographic ID, such as your passport or driving license (note that having an old address on your driving license or an expired passport can lead to complications, so try and make sure documentation is up to date)
- Minimum of three months’ recent payslips
- Bank statements of your main current account covering the last 3-6 months (try not to leave any gaps in the history, as this may look suspicious)
- Proof of your deposit in the form of cash savings and the source of these funds. This is usually done via bank statements, which should be in your name. If, however, your deposit is being gifted, by a relative for example, then you may need to provide some evidence of this.
Remember, the information on your application needs to match the supporting documentation you provide. Names and addresses should match (including the spelling of names). Don’t round up your income if this doesn’t match your payslips. Additionally, don’t claim commission or bonuses if this is not a regular and expected part of your remuneration package.
If you have recently changed your name, due to marriage for example, then you will need to provide evidence of this via a copy of your marriage certificate. It is often these details that lead to queries, delays and sometimes even the possible rejection of applications.
When working out your eligibility for a mortgage, don’t go it alone. Turn to a mortgage advisor and broker. We will walk you through the entire process. We’ll let you know exactly what documentation to provide and advise on a suitable budget for your future property purchase. We will also liaise with mortgage lenders on your behalf to present your application in the best way possible to try to avoid any confusion or rejections.
Finding out your mortgage eligibility could not be easier with Mortgage Light. Give us a call today on 01908 597655 or contact us here.