April 19th, 2018
When it comes to buying your first home, there are a whole host of things to think about – from where you want to live and what sort of property you want to buy, through to how much you can afford to borrow.
And of course, a major consideration is whether you’ll be able to secure a mortgage.
All too often, potential homeowners assume that they will not be accepted for a mortgage and put their plans on hold before they’ve even started the application process.
When any lender approves a mortgage, they take on a certain level of risk. After all, there’s always a chance that a borrower will default on their repayments. To minimise that risk and ensure they only lend responsibly, lenders must undertake an assessment in order to decide whether or not it is a risk worth taking.
Here are the key factors that most lenders look at when considering a mortgage application…
What factors do lenders consider?
When you apply for a mortgage the lender will consider several factors to protect them from the risk of losing their money; whilst also protecting you, the borrower, from getting into financial difficulty.
It probably goes without saying that one of your potential lender’s main priorities will be your level of income. When looking at this, lenders will consider the following:
– Your monthly pay
– Income from investments
– Income from pensions
– Income from child maintenance or grants
This information will allow a lender to develop a good understanding of how much you will realistically be able to pay back each month, thereby helping them to calculate how much they will be willing to let you borrow.
Another factor that will be taken into account on your application is your outgoings.
The lender will consider your living costs and other outgoings to conduct an affordability assessment and to work out how much you can afford to pay back each month.
Affordability assessments were introduced by the FCA in 2014 to help ensure that lenders were lending responsibly.
Your credit history will have an impact on your ability to secure a mortgage.
This will tell a lender how likely you are to keep up with your payments; considering factors such as previous loans if you’ve ever defaulted on a loan and if you have any CCJs.
Lenders will look at this history and assess the risk of you defaulting on their loan.
If you have limited history or have never held open credit in the past this could also have an impact on your ability to secure a mortgage.
Stress testing is a recent addition to which a lender will take into account when assessing you for a mortgage; they are obliged by the FCA to carry out this stress test.
A stress test requires the lender to look ahead and predict if you would be able to cope if something impacted on your finances or mortgage rates increased and if you would be able to recover from the setback.
The electoral roll probably isn’t the first thing that springs to mind when you think about your mortgage application, however, whether you’re on the electoral roll is a factor that lenders will consider.
After all, if you’re on the electoral register it’s much easier for a lender to check your address and establish whether you are legitimate.
What about contractors, freelancers, and the self-employed?
If you’re a contractor, freelancer, or you’re self-employed, you’ll face the same affordability assessment as those who are employed.
However, proving your income will be slightly different. After all, if you’re self-employed you probably won’t be able to provide lenders with payslips like an employee of a company.
What’s more, if you’re a contractor, freelancer, or self-employed your income is much more likely to fluctuate every month; meaning there’s a much higher risk that your income could change significantly, with very little warning.
If you’re applying for a mortgage, you can expect the lender’s proof-of-income process to be much more comprehensive. Essentially, you will need to be able to provide the documentary evidence as proof that you have a stable financial track record and that you’ll be able to meet your monthly repayments for the duration of the loan.
What happens if you fail the affordability assessment?
Whether you’re employed, or a contractor, freelancer, or self-employed, there’s always the chance that you will fail the affordability assessment.
If this happens, it doesn’t necessarily mean that you won’t be able to obtain a mortgage. It simply means that you might have to consider alternative options. For example, the lender might offer you’re a lower amount or the same amount over a longer repayment term.
If these options don’t meet your needs, you should consider the following…
Pay off your debts
If you have any significant credit card debt or personal loans, this could impact upon your ability to pass an affordability test, particularly credit card debts with high levels of interest.
Try and clear as much of your existing debt as possible before you even apply for a mortgage. As well as helping with affordability, this will also help improve your credit score.
Reduce your spending
Another way to boost your chances of passing an affordability test it to reduce your spending. This will not only bring your outgoings down, but it will also show that you’re careful with your money and, of course, help you save money, which is always beneficial!
Look carefully at your outgoings and identify any areas where you can cut back. Can you reduce any of your expenses, such as utility bills? Are you spending money unnecessarily?
Budget, budget, budget
Once you’ve identified any areas you can save money, map out a budget then try and stick to it!
If you’re thinking about applying for a mortgage or you’d like further information about mortgages for contractors, freelancers, and the self-employed, please get in touch.