How Mortgage Lenders Assess What You Can Afford


Are you looking to buy a house? Perhaps you would like to become a landlord, not just at home, but abroad. After all, this is a good opportunity to think of investing in Europe. There are currently reasonably priced properties there, and the market is beginning to stabilise after an uncertainty period following the EU referendum.
Most vacationers who are currently spending their summer abroad –perhaps lodging is such places as Pine Cliffs Portugal and Egnazia in Italy— will tell you that the European scene is a pretty attractive place for investment.

However, it is also important to know ahead of time what requirements the mortgage lender will check to assess your credibility.
In the past, this was mainly determined by your income, and you could be given a loan on a multiple of your income. It is often called the debt-to-income ratio.
Now, when you apply for a loan, the lender will limit your debt-to-income ratio at four and half times your income. They will also assess the amount of monthly payments you can afford, after looking into your various personal and living expenses, including your income. This is called an affordability assessment.

What the Mortgage Lender Checks for

1.Your Income

  • Your basic salary
  • Any extra income you have- for instance, from working overtime, commission or extra payments or another job or freelance work.
  • Income derived from pension or other investments
  • Income from child maintenance and financial support from ex-partners

To verify these, you will need to provide your pay slips and financial statements as proof of your income (here are some tips on how to save for a mortgage).
If you are self-employed, you will need to provide:

  • Corporate accounts
  • Bank statements 
  • Details of paid income tax

2.Your Expenses

  • Credit card payments
  • Any previous loans or credit transactions you may hold
  • Maintenance expenses
  • Bills such as water, power, phone, internet, council tax
  • Insurance; building, legal, contents, travel, pet, health

The lender may request for estimates on your costs of living, such as, clothing, leisure and child care. They may also request for current financial records to verify the figures you supply.

3.Future Changes that might affect you

The lender will determine whether you would be able to pay your mortgage if

  • Interest rates rise
  • You or your spouse lost their job
  • You couldn’t work because of sickness
  • Your standard of living has changed, such as having a kid, or a career pause

It is imperative that you also plan ahead and consider how you would make your payments. For instance, you can protect yourself against unforeseen income drops by growing your savings whenever you can. Ensure that it is sufficient for 3 months’ outgoings, including mortgage costs.

How much can you borrow?

This depends on your annual income and take-home pay. There are lots of online mortgage calculators that you can use. However, while they don’t give an accurate value of what may be applicable, they are good for a rough estimate.

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