What do lenders look for in mortgage applicants?

If you’re thinking of buying a home, you might be wondering what’s the best way of getting approved for a mortgage.

Applying for a mortgage can be complex, so it’s important to know what the lenders want so you can put your best foot forward and make the process as straightforward as possible.

Here, you’ll find out what lenders look for in a mortgage applicant so you’re well prepared for a successful mortgage application.

Verification of income

One of the most critical steps of the mortgage application process is verifying your income i.e. proving that you earn what you say you earn. Lenders use this information to work out how much they’re willing to lend you but to also reassure them that you’ll be able to make the repayments

It’s not as simple as letting a lender know your salary. They will usually require proof in the form of payslips, self-employed accounts and bank statements, depending on your employment status

If you’re employed:

If you’re in permanent employment, the lender will want to see payslips, a P60 and bank statements. The amount of payslips depends on how often you get paid. For example, if you get paid monthly, you’ll usually need at least three payslips or eight if paid weekly. It’s important to note that all lenders have different criteria, so be prepared to provide up to a year’s worth of evidence.

Suppose you’ve recently started a new job. In that case, the lender may require evidence of a contract or a reference from your employer to prove that you have a stable income for the foreseeable future.

If you’re self-employed:

Or, you might be looking for a self-employed mortgage. In that case, you probably don’t have payslips available, so proving your income can be slightly more of a challenge.

When considering applications from self-employed people, lenders will usually want to see at least two years worth of accounts. Ideally, these will be completed by a chartered accountant. They’ll also want to see SA302 forms or a tax year overview and bank statements

Don’t worry if you have less than two years of accounts because some lenders accept a years’ worth. A broker will know which lenders can be more accommodating to borrowers with minimum trading history, so ask to be put in touch with a mortgage broker that’s helped self-employed people so you find the right mortgage the first time.

Lots of brokers claim to be specialists for a range of mortgage products and while that can be great, a professional who dedicates the majority of their working week to a niche area, who is in constant communication with specialist lenders, will likely be in a better position to help you.

Proving other income

In some circumstances, you may have other sources of income such as bonuses/commission, benefits, pensions etc.

Different lenders will have different criteria on how much they will take into account when assessing your application and can be anywhere between 0-100%. 

Our specialist advisors will be able to consider your circumstances and recommend which lenders would be most suitable for you

A deposit

The amount of deposit you’ll need depends on your choice of lender, as well as the amount you want to borrow, the type of property you want to buy and your credit rating.

The average deposit amount in the UK is 15%, but some lenders will allow you to go as low as 5% giving you a loan-to-value (LTV) of 95%.

As a general rule of thumb, the higher the deposit, the better deals you’ll be eligible for and the cheaper the monthly payments.

Affordability

Lenders prefer low-risk applicants with a proven ability to repay their debts.

The amount of mortgage that you’re applying for matters because if the loan size is too large in comparison with your income and other financial commitments, the repayments could become unmanageable.

Calculate your affordability with a broker, so you can find out how much you could borrow and what the repayments would be like along with your current outgoings like your bills, car insurance or childcare, for example. 

You can also use our straightforward mortgage calculator to get an idea ahead of speaking to an expert. 

A low debt-to-income ratio

Another method lenders will use to assess your affordability is your debt-to-income ratio (DTI). Quite simply, this is your total monthly debt payments compared to your monthly take-home income.

To determine your DTI, add up your monthly bills such as

• Credit cards
• Loans
• Car finance
• Current mortgage or rent payments

Divide the total by your gross monthly income, which will present you with your DTI as a percentage

The lower your DTI, the less risk you present to a mortgage lender; therefore, the broader range of deals will be available to you. Anything under 30% is usually an acceptable amount for lenders, but the higher you go, the more wary lenders will be and the stricter they will be in their affordability checks

A credit report that indicates you’re low risk

Your credit report plays a crucial role in the lender’s process of determining your suitability for a mortgage. They will check your credit history to see how well you’ve managed your finances in the past to try and predict how you’ll handle them in the future. The main things the lender will be looking at is

1. How much credit you’re using - having debts isn’t necessarily a bad thing, and well-managed credit accounts can signal to the lender that you’re responsible when it comes to borrowing. However, being constantly close to your credit limit can indicate that you rely on credit too much.
2. Your payment history - lenders want to see that you are the type of person who pays their credit accounts on time. If you miss a payment or are late making one, it will negatively mark your account. Too many of these will be a red flag to the lender and indicate you may have trouble paying your bills.
3. Recent credit searches -  every time you apply for credit, the lender will perform what is known as a ‘hard search’. Hard searches stay on your credit report for a year, and too many in a short space of time may indicate to the lender you’re having financial difficulty even if you’re not
4. Public court records - any negative records such as county court judgements or bankruptcy will suggest to the lender that something has gone financially wrong. Having such a history makes getting a mortgage a lot trickier, although the further back, the better. Details stay on your report for six years, so if you’re approaching the date where negative records will drop off, it could be worth waiting a little longer.
5. Linked finances - lenders will also want to see who you’re financially associated with, for example, a person with whom you have a joint account. The lender will also take their credit history into accoun
6. Your addresses - your current address and address history is used by lenders to help confirm your identity. They will compare the records with the electoral register to make sure they match up. If there are discrepancies between them or if there is limited address history, the lender is likely to be wary as it can sometimes be a sign of fraud.

Your credit history is logged by three credit reference agencies, Equifax, Experian and TransUnion. There is no one-size-fits-all approach to lenders checking your credit history, with each one having different criteria of what they’re looking for. Speak to one of our specialist mortgage advisors today to get professional tailored advice on securing the best mortgage for you.

What if I have bad credit?

You’d have a perfect credit history in an ideal world, which makes getting approved for a mortgage pretty straightforward. Unfortunately, life happens, and particularly with the recent pandemic, many people have found themselves with a less than perfect credit score

Luckily, all is not lost. There are a variety of lenders who specialise in providing mortgages for people with bad credit. In which case, it’s worth speaking to our specialist bad credit mortgage advisors who can match you to the perfect lender.

You can read more about how you can get a bad credit mortgage here.

Do my assets count?

As well as taking all the above into account, lenders will also take note of your assets when considering a mortgage application. Assets can be anything from cash savings, property, or other valuable items such as cars, jewellery, etc.

Having such assets can reduce your perceived level of risk to the lender because you essentially have a ‘backup’ in the event of not paying your mortgage payment.

How do I get started?

When it comes to applying for a mortgage, there are so many moving parts that can become quite overwhelming quickly. Contact us today on 02380 980304, and we will match you to one of our specialist mortgage advisors for a free no-obligation chat. We’ll walk you through the mortgage process and help you find the right mortgage for you without the stress.