A house is one of the biggest purchases you will ever make, and for most people, this means applying for a mortgage through a mortgage broker or lender.
A mortgage loan is a specific type of loan that pays for the cost of a property upfront but on the legal condition that if the buyer cannot or does not abide by the terms of the loan the provider can take ownership of the property instead.
Because of the stakes involved, many providers will have certain qualifying factors in place to ensure that you can afford the repayment schedule over the next few decades.
Different mortgage types exist for different types of homes, different financial situations and to help people who would otherwise struggle to get a mortgage onto the property ladder, and these will themselves have different criteria in place.
Here are the most critical factors affecting mortgage approval:
A credit rating, or credit score, is a singular score that is calculated by a person’s history of making payments, how much they apply for credit, how much they owe and other miscellaneous factors such as being on the electoral roll.
Whilst it is not the be-all and end-all of any mortgage application, it is commonly the first statistic lenders will look at, and often can dictate particular interest rate terms.
Thankfully, a credit rating can be easily improved by paying down debt, repaying on time and not applying for new credit.
How much you can pay immediately for a home will have an effect on the size of repayments and how long the mortgage will last.
Typically, this is expressed through the loan-to-value percentage (LTV), which is the percentage of the price of the property you would still need to pay for.
Ideally, you would want to have a deposit that is around 20-25 per cent of the home’s value, although schemes exist that have widened the availability of 95 per cent LTV mortgage.
Lenders want to know where your money is coming from and whether you have a consistent source of income. For most lenders, the ideal is to have worked steadily for at least two years, or have income from another source.
However, this has historically led to issues for people who work in fields with less consistent income, such as authors and freelance workers, who may need to provide further information regarding their revenue.
Finally, there is the value of the house being bought that many lenders will consider. Lenders do not want to be left with a home they cannot sell in the case of a repossession, and so they will ask for an appraisal and an inspection of the home, as well as other wider conveyancing checks.
If the inspection price is lower than the price you have agreed to pay, many lenders will only lend the LTV percentage of the appraised value and you will need to find the rest of the money if you wish to continue the purchase.
However, in that case, ‘caveat emptor’ takes full effect. If a house is worth significantly less than the asking price, that should be a red flag with regards to whether you want to continue your purchase.