Before you can realistically start a search for your dream home you need to know what you can afford. Most of us need a mortgage to buy our next home unless, of course, we are downsizing from a larger home in retirement. Therefore, how much you can realistically expect to be able to borrow is critical to the process.

When deciding how much a mortgage lender is prepared to loan to you they will have a variety of pre-set criteria against which they will assess your application. What’s more, each lender, whilst some of their primary criteria might be similar, will have different requirements. For this reason alone it’s well worth employing the services of an independent mortgage advisor such as Mortgage Required so as to ensure that you are applying to the right lender for your situation.

Whereas one lender might be uneasy with the self-employed, another might have a product aimed at this market. Some lenders will consider a household’s second income and lend more on it than others. Some require a large deposit, others are less demanding. However, there are some basic criteria that all lenders will have and they boil down to these;

What is the LTV (Loan to Value) ratio on the home purchase?

To calculate the LTV divide the loan sum by the purchase price. The ratio you are left with is the LTV and it is expressed as a percentage. For example, if you want to buy a home for £150,000 and you apply to borrow £120,000, and make up the rest with a deposit of £30,000, then the LTV is 120/150 = 0.8 or 80%. Most lenders will offer their most competitive terms to borrowers with a LTV of 60% or less although in reality many first-time buyers have an LTV of 85 - 95%. This is where schemes such as the Government’s Help to Buy Equity Loan Scheme and Help to Buy ISA are worth exploring.

What does Loan to Value (LTV) mean?

What is your credit history?

Bad debts (historic or current) or a poor record of paying bills will not help your mortgage application. Your credit history is made up of lots of pieces of information compiled about you over time and is likely to include employment history, any missed payments to utility companies, extended overdrafts, credit cards and personal loans and bad debts or CCJs (County Court Judgments) made against you. It’s worth checking your credit history before you apply for a mortgage so that any incorrect information can be identified and rectified. Various third parties offer this service.

What affects my Credit Score and how is it Calculated?

What is your Income?

Not unsurprisingly, a lender needs to know that you have enough income to pay back the loan (and interest). They will want to see regular and reliable income. The more secure the job seems to be, the better. If you have been with an employer some time and you’re on a fixed wage or salary then this will usually be attractive to a lender. By contrast, a history of recent job changes and zero hours contracts - or self employment - will require you to consider specific lenders. If you have a second income in the household many lenders will consider it, although they may only lend a smaller multiplier on the second income. A multiplier is the number of times salary a mortgage company will lend. Most lenders will expect to lend up to 3 or 4 times your primary income, excluding overtime or discretionary bonus.

For example, if a borrower earns £30,000 before tax a lender might lend him £120,000 at 4 x income. Alternatively, if there is a second income of say £20,000 in the home, the lender might lend 4 x first income, plus 1 x second income. E.g. £120,000 + £40,000 = £160,000. Each proposition will vary dependent on circumstances but within criteria set by each lender.

What can you afford?

Probably the biggest change in lending practice since the 2008 credit crunch has been the legal requirements now placed on lenders to make sure that borrowers prove that they can actually afford to pay the monthly repayments. In order to do this they will ask for detailed information on your monthly and annual expenses including grocery bills, utilities, holidays, etc. They will ‘stress test’ your application to make sure that even if borrowing rates went up or, perhaps, one of you lost their job, you were still able to illustrate that you could keep paying the mortgage.

Before you start looking for your next home it’s worth talking to an independent advisor so that you have a clear understanding of what you can afford to borrow and how much it will cost you. You can even apply for a mortgage ‘in principle’ meaning that a mortgage company has evaluated your circumstances and made you a mortgage offer, subject to you agreeing to buy a specific home. This way any seller will know that you are a serious buyer, thus affording you more power in any negotiation.

How to get a Mortgage Approved in Principle?

To establish what your circumstances will allow you to borrow in today’s market, contact Mortgage Required for a no-obligation chat.

Download our Free First Time Buyers Guide

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