So you’re thinking of buying a new home, which for many of us, apart from the lucky few that can pay in cash, will have to get a mortgage from a lender. Knowing what they’re looking for on your application ahead of time can help you improve your chances of being accepted.
Mortgage lenders look at a variety of factors when they review your application to determine your level of risk of repaying the money. Lenders mainly look for positive credit history, affordability through a steady income, and proof of a deposit.
These aren’t the only factors that can affect your application so in this post I’ll explain what they’re looking for when you apply to get a mortgage.
What Do Mortgage Lenders Look For On Bank Statements?
With your bank statements, some lenders will scrutinise all of your transactions for the last 3 months to measure affordability, others just use them as proof of income, however, being prepared for them to be thoroughly reviewed can help you avoid unexpected surprises.
The main things mortgage lenders look for on bank statements are:
- Proof of Income. On your mortgage application you usually have to write down your level of income, this can be from a variety of sources although for most people is mainly from their job. Showing the money that hits your account each month helps the lender assess affordability as is the amount you actually have available to spend after tax, pension contributions and other deductions.
- Affordability. The lender will look through your expenses compared to your income to assess whether you can afford to pay the mortgage each month. They’ll mainly look for recurring payments and trends such as other debt obligations, phone bills, gym memberships etc. They’re aiming to work out how much disposable income you have every month as the more you have, the less risk there is if somewhing were to go wrong like unexpected expenses or interest rate increases and you stop paying your mortgage.
- Bad spending habits. This can be different between lenders, however there are some expense categories that can raise red flags to certain lenders or example whether you have regular gambling transactions or spend a significant amount of your income each month on extertainment.
Do Mortgage Lenders Want to Know About My Other Assets?
Whilst mortgage lenders mainly focus on your income, debt and expenses, if you do have other assets it is worth making your lender aware of them as it can help make you look less risky and help your application.
For example, you may have additional savings accounts that you aren’t using for your deposit, retirement accounts, or investment accounts. The benefit to the lender with these is that if something were to happen such as your expenses went up or you lost your main income source such as your job, you’d be able to access these assets to help pay the mortgage.
What Do Mortgage Lenders Look For On Credit Reports?
When applying for a mortgage, the lender will closely review your credit report to help identify whether you pose an investment risk. Whilst having a high credit score certainly helps as shows fundamentally you’re more creditworthy, the lender will dig much deeper.
I’ll run through some of the main factors the lender is looking for.
- Payment history. Lenders will review your credit history across all of your other financial products including credit cards, loans and lines of credit like overdrafts. The more positive history you have the better as gives the lenders more proof that you’re a responsible borrower that pays the money back. This can work against people that have minimal payment history and can often result in them having a low credit score. If you do have any late or missed payments, the lender may ask you for an explaination.
- Credit Utilisation. Your credit utilisation is a ratio used to measure how much of your given credit you’re using at any given time. If you’re using the majority of your available credit, this looks risky to a lender as shows you are overleveraged and may not be able to manage money well. Most lenders want to see a credit utilisation of under 30%, ideally under 10%. For example if you have a credit card with a £5,000 credit limit, try and only spend up to £1,500 at any given time until you’ve paid it off. This is why having large credit limits can sometimes be an easy way to manage your utilisation metric, just be careful applying for a credit limit increase just before a new mortgage application.
- Recent financial applications. Lenders look to see if you’ve recently applied for other forms of credit or debt. These come up as hard credit searches on your credit report and are visible to lenders that review your report. Having up to two hard credit searches in the last 12 months is usually find, however if you have a flurry of recent applications, such as for credit cards, car finance and personal loans, it can signal to the lender that you may be in financial trouble and pose a high risk as a borrower.
- Major issues. This can include any negative points that have been raised on your credit report incluidng bankruptcies, judgements, delinquencies, accounts in collections, settlement reductions and disputes. Probably goes without saying that these are red flags to the lenders and even one of them could cause the lender to deny your mortgage application. Make sure to review your credit report before you apply for a mortgage so you can check to make sure everything is right. If there are any issues including things that are wrong (that can happen) it will give you time to try and correct it.
What Debt to Income Ratio Do Mortgage Lenders Look For?
Each mortgage lender has different acceptance criteria for approving a mortgage application, including for debt to income ratios. Ideally, you should aim to get your other debt as low as possible, especially if it is high-interest debt like from credit cards or car finance.
Having other debt affects quite a few measures the mortgage lenders assess, including affordability. Having to pay off a portion of your other debt each month reduces the amount of disposable income you have available to pay your mortgage.
When assessing your affordability, the banks stress test multiple factors including increasing your interest rate or increasing your expenses to check whether you’d still be able to afford your mortgage if something unexpected were to happen.
This post I’ve written on whether you should pay off your credit card debt before buying a home may be useful to read for more information.
Loan To Value Ratio – Why Deposit Size Matters
Another key factor that mortgage lenders look for to determine the level of risk for your application is your loan to value ratio. As it sounds, this is the proportion of the value of the property that you want to take out as a loan.
For example, if you are looking to buy a house with a 10% deposit, your loan to value ratio would be 90% meaning the mortgage would cover 90% of the property’s value.
The higher your loan to value ratio, the higher the risk for the lender. This is because if something were to go wrong, such as you stopped paying your mortgage, the lender would need to sell the property to recover their investment.
Using different loan-to-value ratios you can see how the level of risk to the lender changes. For example, a 95% loan to value ratio compared to 75% means the lender would have to sell the property for 95% of the value of the property compared to 75% to recover their investment.
As you can imagine, it’s a lot easier to sell a property for 75% of the value compared to 95% so the risk to the lender to recover their investment is lower. This is why the higher you can get your deposit, usually into 5% increments, can help your mortgage application.
Overall, as you can see there are a lot of different things a mortgage lender looks for when assessing your mortgage application. The main thing the mortgage lender is trying to assess is whether you are a good person to lend money to and whether you’ll be able to pay the money back.
This means the more you can demonstrate to the lender that shows you’re low risk, the better your chances of getting your mortgage approval.
If you do have any specific questions make sure to contact a mortgage advisor that can explain all of your options aligned to your current situation.
Also if you are thinking about speaking with a mortgage advisor, this post I’ve written on what questions to ask a mortgage advisor may also be helpful. Hope your mortgage application goes well!
Hi, I’m John. I’ve always had a keen interest in Finance, so much so that I’ve made a career out of it! This site is a place where I can share everything I’ve learned as well as give me the excuse to research certain topics.
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