How is Mortgage Affordability Assessed?
Mortgage affordability is typically assessed by lenders' underwriters and will consider two main components; the applicant’s income and their expenses; this is all in addition to the assessments of your credit score and history. The mortgage affordability assessment process is a vital step in the process of taking out a home loan of any nature including home improvement mortgages, first and second charge mortgages. This assessment not only determines whether your application will be accepted, but also how much providers will be willing to lend you altogether.
A mortgage is likely to be the biggest financial move most people will ever make in their entire lifetime. It is a major responsibility and commitment, with a lot to lose if repayments are not made on time and your property is repossessed. Those considering a mortgage must therefore take great care before applying and should be confident that they wil be able to keep up with the repayment plan for a loan of this size.
For those who have done their research, and are confident in the knowledge that they can keep up with a repayment plan of this size, a mortgage is a great way to help in your pursuit of homeownership, home improvement or property investment.
What is a Mortgage Affordability Assessment?
A mortgage affordability assessment is part of all secured home loan and mortgage application process, through which providers will assess whether the applicant can afford the mortgage, and subsequently how much the applicant can manageably and realistically take on. If you are applying for a mortgage through a lender, with their panel of lenders, this will be considered initially by the broker, but ultimately the lender who is parting with their money will have the final call.
Why Are Mortgage Assessments Important?
Mortgages are always a financial risk for both the borrower and the lender and so an affordability assessment helps to make an informed and more accurate assessment as to whether the applicant can in fact handle such a major financial responsibility. It may well be the case that an applicant is rejected for a mortgage as a result of not meeting affordability criteria as part of the mortgage affordability assessment.
A mortgage affordability assessment can have a great impact on the type of property you will be able to purchase and the level of funding you receive to renovate your property.
The process of an affordability assessment will vary dependent on the type of lender and mortgage provider you end up proceeding with. However, all assessments relating to a secured loan like a mortgage will have the same end-goal in mind, to adequately evaluate whether you are in a position to actually afford a mortgage.
What if I’m Self-Employed or Not Fully Employed?
In order to get a loan that best suits your personal financial situation, it is important to be as accurate and honest as you possibly can be when providing the requested details for the assessment. This will include all incomings and outgoings for your household.
If you are a sole trader or other self-employed worker, your requirements will be different from those of traditional employees. That said, no matter what type of worker you are, the premise of the checks and assessments are the same, to ensure affordability for the benefit of both lender and borrower.
What Are the Criteria for Mortgage Affordability Assessments?
Your mortgage affordability is primarily assessed on two major factors of your personal finances, these being your annual income and your outgoings and expenses.
The reasons for this strict focus on your incomings and outgoings is in order to gain an accurate picture of your financial position and to assess how much money you will be left with from your income after your expenses are deducted, and therefore how viable any type of mortgage or home loan will be with the remaining balance.
What Documents You Will Need to Prove Affordability
Along with these evaluations, checks and validation processes, you will also be asked to provide other relevant information. This will include various forms of documentation and evidence of your current financial and personal situation including:
- A valid form of photographic identification
- Whether you have any other loans that are yet to be paid off
- Evidence of your current address
- Evidence of permanency at your place of abode
- Utility bills and council tax records
What Credit Checks are Carried Out to Assess Mortgage Affordability?
With all mortgage affordability assessments, the lender or panel of lenders (if you apply via a mortgage broker) will conduct a hard credit check, which will leave a credit footprint on your record and you should always be aware of this. This will provide the lender with a history of your relationship with credit and borrowing, thereby determining how trustworthy you are as a credit prospect.
As a hard credit check, you should be wary of too frequently applying for any loans, be they secured loans or otherwise. Home loans, mortgages and other lines of credit, applied for too close together indicate desperation for credit and this is frowned upon and negatively viewed by all lenders. Lenders and credit providers will, through the viewing of your credit record be able to see each occasion upon which there has been a hard credit check.
It is worth noting that you must be confident that you will pass a credit check with the mortgage provider, as rejection of an application after a hard search can have a significant impact on your credit history, and can bring your credit score down. If your credit score goes down, you may find it even harder to apply for loans, as the lower the credit score, the less creditworthy you become for the majority of lenders out there.
What Happens if I Fail a Mortgage Affordability Assessment?
If your mortgage application is denied, this most likely means that you will not be able to take out a mortgage or other home loan with these lenders. However, this is not always the case, with some mortgage lenders rejecting only the value, rather than the principle application and intended purpose(s) of the loan.
If you face rejection for a mortgage application, the lender may still be able to offer you a mortgage, albeit of a different amount or nature, however this may be smaller than the initial sum applied for.
If you are rejected from the loan ‘flat out,’ there are ways in which you can help to improve your mortgage application chances the next time you apply for a mortgage:
- Paying off any existing debts
- Build up a good history with credit and improve your credit score
- Improve your financial management, reducing your outgoings and saving more of your incomings
It is helpful to understand why you were rejected from the application in order to improve your chances with any lender for the next time you apply. If you are still unaware of why your application was unsuccessful, you can contact the mortgage providers directly to get the answers you need.