Applying for a mortgage can often seem to be a complicated process, and in many cases, the mortgage lenders themselves do nothing to dispel the mystique. The folklore and legend which has built up over the years is quite astounding, ranging from rumours that having a home telephone number scores more points than a clean payment history, to those who maintain that you can tell whether the loan will be granted or not by the colour of the application form used. Whilst there might have been an element of truth in some of these legends years ago, they have very little to do with the decision making process today. Nowadays, when you apply for a mortgage, the lender will assess three distinct aspects as follows:
Quite simply, the security is the value of the property less the amount of the mortgage required. This is also referred to as the equity in the property, and the greater this amount is, the more likely it is that the lender will be willing to grant the loan. A large amount of equity could also result in a lower rate of interest being payable.
Mortgage lenders will place a different emphasis on the amount of the equity in a property, depending on whether prices are rising or falling. In a rising market, the value of the equity is increasing, and therefore a lender can accept applications where the amount of the mortgage is the same or only slightly less than the value of property. When house prices are falling, lenders will insist on their being a much bigger difference between the value of the house and the amount they will lend, resulting in a large deposit being required. Currently, there are one or two lenders who will lend up to 90% of the value of a property, but only the best applicants are accepted, and the interest rates are very expensive indeed. A 15% deposit will be required to benefit from any real choice, with a 25% deposit being required to qualify for the best rates available.
Ability to pay
Assessing an applicant’s ability to pay is no more complicated than subtracting what they spend from what they earn. The difficulty lenders face is in being able to do this accurately. Establishing what an applicant earns is reasonably straightforward, and many lenders will rely on copies of pay slips etc, accompanied sometimes by a telephone call or letter to the applicant’s employer. In the not too distant past there were schemes referred to as self cert or self certification, whereby an applicant with enough equity or a large deposit could simply state what they earned, and be excused the trouble of having to provide proof. Unfortunately, there have been too many instances where applicants inflated their earnings, and such schemes are now few and far between, and only available to those who have a genuine reason for not being able to formally prove what they earn, such as some self employed people.
Proving spending can be trickier, and this is where a good mortgage broker can be invaluable. All lenders will deduct the annual cost of servicing other debt such as loans and credit cards from income before they assess affordability, but they don’t all deduct the same amount. Whilst most lenders will deduct 3% per month for credit card balances, there are still some lenders who deduct 5%. For someone with a credit card balance of £10,000, this could result in a difference of up to £12,000 in the maximum loan available. A good mortgage broker will also know which lenders can take alternative sources of income, and this can make a significant difference to the maximum loan available. For instance, whilst most lenders only consider earned income for mortgage applications, there is one very large lender who will allow both Working Tax Credit and Child Tax Credit to be counted, and will even gross these amounts up, pretending that tax had been deducted before receipt.
Establishing a true figure for an applicants living expenses can prove difficult however, and most lenders now accept that outgoings are generally underestimated by the applicant. This has led all lenders to adopt a set of expenditure figures derived from their own surveys, so that they can have confidence in the figures being used to quantify the applicant’s affordability. Assessing applications in this way ensures as far as possible that the lenders do not grant loans to those who cannot afford them. Whilst a loan may be affordable and can be demonstrated as such, using expenditure obtained from census in this way can often means that application are declined.
In assessing ability to pay, lenders will also look at not only the level of income, but the likelihood that it will continue into the future. Therefore, an applicant who has had a stable employment history will be more attractive than one who has switched jobs frequently, or has recently taken up their position. The frequency with which an applicant has changed address in the past will also be taken into account.
Willingness to pay
Lenders are keen to ensure that they only grant mortgages to those who will be committed to keeping up with their repayments. To assess this, they will look at current and past credit commitments, and whether payments were made in full and on time. In times gone by a good number of lenders would ignore the odd credit hiccup, such as a missed payment for a mobile phone or catalogue, but now lenders are less likely to accept any form of past problem, and it is only those with a good credit profile that will be accepted where the lenders only have limited funds to lend.
In years gone by, an applicant who scored high in two of the three areas of assessment would have been an acceptable risk, but this has now changed with lenders requiring a suitably high credit score in all three areas before accepting an application for a mortgage. The few schemes which still exist for those who have a chequered credit history or complicated income are very specialised, and most are only available via suitably authorised brokers. For those who do not have equity in there property or a deposit, there are currently no mortgage schemes currently available, specialised or otherwise.