The Mortgage Assessment: Key Factors For Applicants

Applying for a mortgage is a major financial decision and lenders will assess your suitability for a loan in a variety of ways. The process can be intimidating, but by understanding what lenders look for, you can be more confident in your application. Lenders will evaluate your income, employment history, savings, monthly debt payments, and other financial obligations to ensure you can comfortably take on a mortgage. They will also check your credit score and history to assess your record of paying bills and other debts on time. In addition, they will consider your age, the type of work you do, and whether you are borrowing alone or with someone else.

Income

Lenders will typically request to see records from the last two years, including current pay stubs and W-2 tax forms. If the applicant has recently changed jobs or received a raise, they may need to submit additional pay stubs and a statement from their workplace confirming that the change is permanent. Self-employed applicants will generally need to provide a two-year track record of successful earnings and share their tax returns as evidence of income earned. Lenders will average the income if it is increasing and take the lower figure if it is decreasing.

There are various types of income that can be used on a mortgage application. These include salary or hourly wages, social security income, rental property income, spousal support, investment income (including interest and dividends), disability income, VA benefits, military income, and alimony or child support payments. Each income source will need to be verifiable and steady to qualify. Lenders may also take bonuses, commissions, or overtime into account when determining the applicant's overall income. However, income not shown on tax returns or not yet claimed will likely not be considered in the mortgage qualification calculations.

In addition to income, lenders will consider other factors such as the applicant's credit score, credit history, debt-to-income ratio, and employment status. Lenders typically prefer applicants who are in full-time, continuous employment in stable sectors rather than part-time workers in unsecure jobs. The applicant's age may also impact their eligibility, as most lenders will only offer a mortgage up to a certain age, typically 66 or 67.

Employment

Lenders typically verify employment by directly contacting employers to confirm details such as employment status, job title, and income. They may also request income information and relevant documentation, such as pay stubs, W-2 forms, or tax returns. Most lenders only require verbal confirmation, but some may seek email, fax, or third-party verification. Self-employed individuals may need to provide tax return transcripts or other documentation to verify their income.

The type of employment also matters. Full-time employees are often seen as more stable borrowers than part-time or temporary workers. Lenders may also consider the industry or sector of employment, with stable sectors being viewed more favourably. Additionally, the length of employment is important. Lenders prefer a consistent job history, and frequent job changes or gaps in employment can raise red flags, potentially leading to higher interest rates or denied applications.

In cases of secondary or multiple sources of income, lenders have specific criteria for qualification. For example, a two-year history of earning a second income is generally required, and this income must be formally declared on tax documents. Lenders may also consider letters from secondary employers or clients that corroborate the stability of the additional income.

It is important for applicants to provide accurate and up-to-date employment information. They should also be prepared to supply supporting documentation, such as recent pay stubs and tax returns. Keeping employment records organised and being honest about employment status can increase the chances of a successful application.

Savings

When applying for a mortgage, lenders will want to see a clear and consistent track record of savings being made over several months. This demonstrates financial responsibility and stability, and reassures the lender that you are a good candidate for a mortgage. Even modest savings can count in your favour if you can show that you regularly put aside money from your monthly salary. Lenders will also want to see that you have enough cash saved up for the down payment, closing costs, and future mortgage payments. They may also look for cash reserves, which are extra funds available in case of an emergency.

Lenders will also take into account any other assets you have when assessing your mortgage application. Assets are items you own that have a monetary value and can include cash, investments, properties, cars, valuable items, business shares, and other financial assets. These assets demonstrate your financial stability and ability to repay the loan. When reporting assets, it's important to provide accurate values and supporting documentation. Lenders will also want to verify that the source of your assets is acceptable and that the funds in your bank accounts are yours and not borrowed from someone else.

In addition to savings and assets, lenders will also consider your income, credit history, employment status, and other financial commitments when assessing your mortgage application. They will want to ensure that you are a reliable borrower who can make timely payments and handle the financial responsibilities of owning a home. They will also look for any red flags, such as missed repayments or recurring payments to online gambling platforms, which may affect your eligibility for a mortgage.

Credit score

Lenders will use your median score if you are applying by yourself and the lowest median score if you are applying with a co-borrower. It is important to check your credit score and correct any errors before applying for a loan. A good credit score demonstrates that you can manage your finances and handle your payments. Lenders will also look at your employment history, income, debt-to-income ratio, and savings to evaluate your ability to take on a mortgage.

Your credit score is calculated based on several factors, with the most important being your payment history (35%) and the amounts owed (30%). Payment history gives lenders a direct view of whether you have made past payments on time. Owing large amounts may cause lenders to worry about your ability to handle new payments, which will negatively affect your credit score. Other factors that impact your credit score include opening or closing accounts and regularly checking your credit reports.

Expenses

When applying for a mortgage, it's important to understand how lenders assess your expenses to determine your eligibility for a loan. Lenders will evaluate your income, monthly expenses, and overall financial situation to gauge your ability to repay the loan. Here are some key aspects related to expenses that lenders consider:

Income and Employment:

Lenders will review your income stability and consistency by examining your employment history and income documentation, such as payslips and tax records. They assess the length of your employment and look for any irregularities in your reported income. A longer employment history and stable income can positively impact your loan assessment.

Monthly Expenses and Debt:

Lenders will consider your monthly expenses, including essentials such as utilities (heat, electricity, water, etc.), insurance, property taxes, and other living expenses. They may also factor in any non-essential expenses, such as smoking, gambling, or recreational activities, as these can impact your overall financial picture. Lenders use affordability calculators to assess whether you can manage the monthly expenses associated with the loan.

Credit Score and History:

Your credit score and history play a crucial role in determining your eligibility for a mortgage. Lenders will evaluate your repayment history, amount of debt, and length of credit history. A higher credit score can result in a better interest rate, making your loan more affordable. Conversely, a low credit score may lead to a higher interest rate.

Down Payment and Deposit:

The size of your down payment can significantly impact your expenses and the lender's assessment. A larger down payment demonstrates your financial stability and can increase your borrowing capacity. Lenders may also consider the source of your down payment funds, so be prepared to provide documentation if the funds are gifted to you.

HEM Living Expenses:

The Household Expenditure Method (HEM) is used by lenders to determine living expense allowances when assessing loan applications. HEM levels categorise living expenses into basic, moderate, and lavish, based on household characteristics and income. Larger households with more dependents or higher incomes may have higher HEM levels to account for increased expenses.

Other Considerations:

Lenders may also consider ongoing expenses, such as children's private school fees, and joint debts with individuals not on the loan application. Additionally, they may review your bank statements to identify any undisclosed regular debits. If you are self-employed, be prepared for lenders to scrutinise your business expenses, as they may be included as personal expenses.

Frequently asked questions