Aspects of Mortgage Lending Decisions

Posted by Kevin Pearce in Mortgages on 16 April 2019 - Kevin is a Senior Credit Analyst at checkmyfile

The vast majority of mortgage providers keep their lending criteria a closely-guarded commercial secret, which makes figuring out your chances of getting accepted for mortgage tricky, though a mortgage broker may be able to point you in the right direction based on your credit history.

But even though it’s impossible to know every lender’s specific criteria, there is certain common ground that applies to most mainstream lenders (though how strict or relaxed the lender may be on certain points can differ widely), though you may also findprofessional mortgages can have a slightly different criteria as well, but are only available to individuals in certain professions under specific circumstances.

These are the areas that all mortgage lenders will assess, no matter where you apply and how much you’re after.

Amount of deposit and loan-to-value (LTV)

Loan to Value (LTV) is simply the percentage of the property value that you need to borrow in order to purchase it after you’ve put down a deposit.

100% mortgages are largely a thing of the past, but mortgages anywhere between 60% and 95% are available, meaning you may have to pay as much as 40% or as little as 5% of the property price as a deposit respectively.

Example:

  • A property is on sale for £200,000
  • Your deposit is £20,000
  • Amount of money needed to purchase property is £180,000 (excluding fees)
  • The LTV required is 90%

Your LTV not only has an impact on the amount that you can borrow, but it also affects the interest rates you could be offered. Because mortgage lenders often price for risk, the more you need to borrow, the higher your perceived risk of defaulting on payments and as such the interest rate you are offered as a result may be higher.

Conversely, a larger deposit and a lower LTV may make you more likely to be eligible for a better mortgage deal.

Affordability

Your Affordability assesses how much you could comfortably afford to repay each month for the proposed mortgage based on your income and expected monthly outgoings. These regularly include credit cards, loans, childcare payments and so on.

Different lenders use different ways of calculating your affordability, commonly by applying a multiplier to your income to see the full amount they would be willing to lend or by taking a percentage of your income e.g. 40% to determine your monthly repayment amount.

If you have been employed for less than 3 months, a lender might base this calculation on the income from your previous job, which could mean you get offered a lower amount as a result.

In simple terms, for the best chance of successfully passing these checks, you’ll need to ensure your outgoings are as low as possible, while the income should be as high as possible. While this sounds easier said than done, there are ways you can achieve this for the purpose of the application:

Ways to lower outgoings

Term: extending the term is one of the simplest ways of reducing the monthly payment, but make sure you appreciate how much the total amount to be repaid will be.

Clear debt: if you can afford to clear unsecured debt prior to the application you will benefit when the lender completes their affordability calculations.

Increase income

Number of applicants: adding another person to the mortgage will boost the amount of income the household brings in.

Additional income: declare anything that the lender will accept, whether it be disability living allowance, working tax credit or pension income. Child benefit is not normally accepted and maternity pay will usually only be accepted if your employer provides written confirmation of your return date and salary.

Credit Rating & History

Your Credit Report contains a wealth of data that mortgage lenders can use to assess the perceived risk of taking you on as a customer based on past history of borrowing and repaying.

Although there are many facets of information checked and assessed by mortgage lenders, it is the information found here that gives them some of the most helpful useful information around your reliability of repaying money you have borrowed in the past.

Your public data is also checked, which includes your Electoral Roll details and Court Records, which shows any CCJs or insolvencies.

This data is used in conjunction with the information provided on the application, along with the various factors mentioned above.

Many high street mortgage providers will not accept applicants who have a record of insolvency, which is why any CCJs and defaults will likely cause the LTV to be restricted as the risk is considered greater than an applicant who has a clean payment history.

What about my credit score?

One of the biggest misconceptions is that you have a set Credit Score which is assessed by lenders and if your score is high enough you’ll get accepted, and if it isn’t, you won’t. This isn’t strictly speaking true. Lenders often develop and use their own scorecards, just as Credit Reference Agencies do and they may score you against their own criteria, but the number you’re shown alongside your Credit Report online is unlikely to resemble the one used by lenders, or even be based on the same assessment criteria.

Common reasons to be declined for a mortgage

If you are unfortunate enough to be declined, try to work out any areas that may have caused the decision to go against your favour. There’s an element of guesswork involved here, but checking your Credit Report for any errors, or even to give you an idea of what lenders will have assessed is often a good start.

Some of the most common reasons to be turned down for a mortgage are:

  • Over-indebtedness
  • Poor affordability
  • Missing Electoral Roll information
  • Discrepancies between the information you’ve submitted and the information as it appears on your Credit Report
  • Length of employment
  • Court records
  • Your age at the end of the mortgage term
  • Too small a deposit

… the list goes on and can often be a combination of any of these.

Even if you don’t meet one lender’s criteria you could easily meet another’s, so don’t panic. By the same token, don’t apply for countless mortgages at once, hoping that one will accept you. Bide your time, apply for one at a time and research the lender as much as you can before applying for your best chance of success.

If you haven’t already, you can try checkmyfile FREE for 30 days, then for just £14.99 a month afterwards, which you can cancel online, by phone or by email. You’ll get full access to the UK’s most detailed Credit Report, plus help from our UK-based professionally-qualified Credit Analysts should you need it.

Updated 16/04/2019 by Jamie Mackenzie Smith

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