Though it may seem complicated to get a mortgage these days, it can still be done. Most lenders take into account a variety of factors in order to decide whether or not you qualify for a mortgage with their firm. For the most part, we can place these factors into three categories: your income, how much the property is worth and their estimation of your ability to pay.
Your Income
Every lender uses their own formula to determine how much they are willing to give you during the home buying process. However, you can estimate the amount that most lenders are willing to give by multiplying your annual salary by 3.5. According to this formula, you would need an annual salary of ?26,000 to qualify for a ?91,000 loan. The actual amount may vary depending on other factors like credit history or outstanding debts.
In some cases, lenders may be willing to go up to 4 or 5 times this figure if you have a skilled broker. Lenders often offer 3 to 3.5 times the higher salary plus 1 year of the second salary when dealing with couples. A couple where both people earn ?26,000 per year would be eligible for a loan of around ?130,000 using these formulas.
Though they try to make it seem like you have to go through a gauntlet to get the money, competition between lenders is actually quite fierce. They rely on underwriting loans to stay open, so they need you as much as you need them. The quickest way to find out how much you can borrow is to ask an experienced, independent mortgage adviser. Long standing relationships with local lenders and experience make them the ideal resource for accurately gauging your possibilities. Since every case is different, lenders carefully way the unique aspects of each situation. Someone with teenage children and high outgoings can't afford to borrow as much as a singleton earning the same salary.
The Value of the Home
Lenders use a specific "loan to value ratio" to determine how much they are willing to lend. This is usually a percentage which shows the size of mortgage against the property's value. E.g. if the mortgage is ?80,000 and the property's value is ?100,000 the loan to value is 80%. While most lenders offer up to 75%, some go as high as 90% or 100%. But, for these higher percentages, you'll pay over the odds - ie a higher interest rate for this. You also probably be forced to buy mortgage indemnity insurance which is not advisable.
The value of the home is also measured against the value of the other properties located in the same area. Some lenders may refuse a loan if they feel the property isn't expensive enough for the area. More often, it's the opposite case - where a property is seen as too expensive.
The Lender's Opinion of Your Ability to Pay
Our suggestion to first time buyers is to provide records of rental payments of approximately equal value to the desired mortgage. A long rental history shows the lender that you can be trusted to pay the same amount on a mortgage, Bear in mind that the final loan amount may not be congruent with what you can actually afford.
You may be able to get a mortgage that taxes your budget to the very limit, but gets you into trouble when other costs involved in the buying process appear. You should also take into account the future maintenance, taxes, insurance and other related costs when determining how much you can afford on your new home. Some lenders will want to estimate this by checking your average outgoings eg your household bills, any debts etc. Some will get you to fill in a detailed questionnaire either by hand or on the phone or online etc.
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Looking for loan approval tips ? Then these home buying tips are just what you need
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