What is mortgage affordability and what checks will I have?
When you take out a mortgage, under Financial Conduct Authority rules the lender is obliged to carry out certain checks to make sure you can afford the repayments.
All lenders will carry out an affordability assessment, although these can vary between lenders.
A mortgage affordability calculator will give you a quick, estimated overview of your mortgage budget and payments.
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How do lenders determine how much you can afford to borrow?
Every lender will carry out an affordability assessment to check whether you can afford the mortgage now and in the future if rates rise.
The assessment will look at your income and outgoings so that the lender can understand if you can afford to get a loan from them.
What is a mortgage affordability assessment?
These are checks that your mortgage lender will perform to ensure you can repay the loan you have borrowed.
Lenders use a simple formula regarding income multiples and will typically lend 4 or 4.5 times your annual income.
For example, if you had a £30,000 annual salary, you’d typically be able to borrow up to £135,000.
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What questions will be asked you during your assessment?
A lender will need to assess your affordability criteria more in-depth during the initial assessment in order to determine how much you can afford. They might ask questions about your:
- Employment status
- Total gross income
- Outgoings, including any dependents
- Outstanding debts
- Credit history
If a lender is concerned about any of these factors, they may decline your mortgage application or offer you a lower amount than you originally applied for.
What’s the assessment process?
After releasing a report called “Mortgage Market Review”, the Financial Conduct Authority (FCA), issued new guidelines for mortgage affordability in 2014.
All UK lenders are now required to conduct much more scrutiny and analysis before they approve any new lending.
While all mortgage lenders use a multiple to determine how much someone can borrow, this is only the beginning. Each lender has its own ratio so some lenders may be more generous than others.
Most lenders will use an income multiplier of 4.5x, while others will use 5x or 6x, depending on the circumstances.
What happens during an underwriter’s assessment?
An underwriter might cross-check your mortgage application and re-evaluate it. The underwriter will look at your circumstances and the property you are buying.
Underwriting ensures that the mortgage lender is specific that you are suitable for the product you are applying for.
Why would a lender deny your mortgage application?
A lender will consider various factors when deciding whether to offer you a mortgage.
It might turn you down due to:
- Insufficient or unreliable income
- Outstanding debts
- Your credit history
Don’t despair if a lender has declined you for failing their affordability assessment.
Our mortgage brokers are all whole-of-market brokers and have access to all UK lenders. They are happy to answer any questions and assist you in securing the mortgage you desire at the best price.
What length of time do you have to be employed?
Lenders prefer mortgage applicants to have worked for at least 12 months with one employer, although some will accept less.
A handful of lenders will happily accept employment you’ve just started.
Can extra income be taken into account?
If you have a second job, this income might be taken into account too.
Lenders will also include some or all of overtime, commission payments, and bonuses in affordability assessments.
Lenders may ask for proof of regular income, especially if you receive commission. These documents can include payslips, bank statements, and employment contracts. Usually, you’ll need to provide three to six months’ payslips.
What length of time do you have to be self-employed?
If you’re self-employed, lenders might require a track record of trading for at least two or three years. A few lenders will even accept less than twelve months if the circumstances are right.
A mortgage lender may require evidence to confirm the income you have disclosed. They will typically request your certified accounts (usually the past 3 years) or an HMRC SA302 Form.
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What other income sources are acceptable to meet mortgage affordability criteria?
Unearned income can also be submitted to mortgage affordability checks. This might include income from:
- Benefits
- Pension
- Rent
- Investments
- Trusts
- Maintenance payments
If you are earning income from any of these sources and want to know what mortgage you can afford, contact us today for a no-obligation chat with one of our specialist advisors below:
How does a bad credit history affect how much you can get a mortgage for?
Poor credit history can cause issues with lenders’ willingness to lend you money.
Some lenders will consider applications from borrowers with credit problems in the past. There are also specialist lenders who are experts in bad credit mortgages.
You can find more information on getting a mortgage for bad credit in our dedicated article on Bad Credit Mortgages.
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