Buying a First Home? Here’s What Mortgage Lenders Look For
Buying a home has become tangibly more difficult for first-time buyers in recent years, between the stratospheric rise in property values and the impact of interest rate rises on mortgages. Still, it remains a major life goal for many young workers and households across the country, albeit only possible once they pass that first hurdle of getting accepted for a mortgage. Speaking of which – what is it that lenders look for when it comes to getting accepted?
Before You Start – Deposits and ‘LTV’
Getting a mortgage approved is a multi-faceted process, but a major consideration is the size of your deposit. This is due to something called the Loan-To-Value ratio, or LTV. The more deposit you put towards a property, the less you need to borrow to pay off the remainder; putting up the 5% minimum that most mortgages allow will result in a higher LTV, with a corresponding lower acceptance rate and higher interest rate in the event of acceptance.
Saving more for your deposit, then, can be incredibly helpful in improving your personal chances of success. Reducing future debt burdens and accelerating deposit savings is the name of the game for many, with some going as far as to try van life in order to minimise outgoing costs and maximise savings.
Source of Income
Naturally, one of the first things any mortgage lender will do with regard to reviewing your application is to investigate your source – or sources, if you are a couple – of income. Ascertaining financial readiness for a mortgage of a given size is predicated upon proving that given monthly payments are not just possible, but affordable for you.
This means looking over your income for the past few years, and longer if you are a freelance worker. Your income is one of the bigger factors in deciding your fate, mortgage-wise, where lower rates of pay put a low ceiling on the maximum you can borrow.
Another crucial part of this equation is your savings history. This is not just for the obvious aspect of house-buying that is your initial deposit, but also for finding evidence of long-term financial stability and previous patterns of financial responsibility.
Through this, lenders might examine bank statements for any savings accounts you use, or tally your savings against your income and expenditure patterns for the past few years. With this, they can gain something of a picture of your household’s financial situation, and make a clearer judgement on whether you can afford a mortgage agreement in line with your application.
Debt and Credit Score
With regard to ascertaining financial responsibility, there is one consideration that can, in many cases, trump all others – debt, or the state of your credit score. A mortgage, whichever way you cut it, is effectively a loan. Not only that, it is probably the single biggest loan you will ever take out in your entire life. As such, your financial history with regard to debt (and regular payment towards financial responsibilities) could not be more relevant.
A bad, or low, credit score is generated when you have a storied history of failures in repaying debts or honouring other repayment agreements. Low credit scores identify you as a higher risk to any lenders, disincentivising them from patronising you with as large a loan as a mortgage. Regular payment of debts, though, demonstrates responsibility, improving your chances of being awarded a mortgage.