A mortgage affordability check is a method lenders use to decide whether you will be able to meet the repayments on the amount that you want to borrow. It’s a crucial stage in the application process, so it is helpful to understand exactly what is involved. This will give you the best chance of preparing a successful mortgage proposal.
The most important point to remember is that the test is for the benefit of both parties. If the mortgage company lends you more than you can reasonably afford to repay, you may end up getting into debt and this will be recorded on your credit report. A poor credit history can make it more difficult to borrow in the future.
The lender will check your credit history as part of your affordability assessment, but this is not all they will take into account. Some lenders put more weight on a credit score than others, so if you do have any concerns about your past financial record, it is worth contacting a specialist mortgage broker who has experience in this area.
There is no standard mortgage affordability calculator, but all lenders will take into account your income. For most people, this will be their monthly salary, but it could also include bonuses, overtime, self-employed earnings, commission, or an income that you receive through investments. However, lenders may have different criteria for income checks.
If you are self-employed, you will normally have to submit at least two years’ worth of accounts and evidence of your tax returns. However, some lenders may be willing to consider a shorter period of self-employment, so again it’s worth contacting a specialist broker who will know the right mortgage companies to approach.
Whatever your employment status, the lender will take into account your outgoings as well as your income. You will usually be asked to submit three or six months of bank statements so that the mortgage company can see how much you typically spend each month and what proportion of your income will be taken up by the mortgage repayments.
If you have a lot of outgoings, it’s worth reviewing your household budget in the months leading up to your mortgage application to see if it is possible to make any savings. The lower your outgoings, the more you are potentially able to borrow.
For example, if you are able to pay off a car loan or avoid booking an expensive holiday in the months before you intend to apply for a mortgage, this can put you in a better position. There may be subscriptions that you no longer need or use that you can cancel, and it may be worth shopping around for cheaper car insurance deals and so on.
Lenders refer to this stage of the assessment as debt-to-income ratio (DTI). For the best deals, a DTI of 30% or less is ideal. If you do have a high DTI, it’s advisable to take some steps to bring it down before your application is submitted. However, some lenders will still consider a high DTI, so again it’s best to seek some professional advice.
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Your home may be repossessed if you do not keep up with your mortgage repayments.
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