Assessing Your Mortgage Eligibility
After the 2008 UK financial crisis, lenders began employing strict measures before approving mortgages. By 2014, the Financial Conduct Authority required lenders to perform thorough affordability assessments before granting loans. The evaluation considers your personal and living expenses, as well as the level of monthly payments you can afford. It includes a stress test which simulates how consistently you can pay your mortgage under drastic financial changes. To determine the loan amount, lenders specifically consider your credit score and history, debt-to-income ratio , size of the deposit, and the price of the property you are buying.
Expect lenders to scrutinise your employment records, how long youve held your current job, and your present address. They also check the length and history of your bank accounts, together with other debt obligations you must fulfil. To do this, they review your also known as your credit report, which is used to determine your credit score. This gives insight into your ability to make mortgage payments. Ultimately, your records must prove youre a reliable debtor who always pays on time.
Mortgage Affordability Assessment Factors
To prepare for your mortgage application, be sure to gather the following documents:
If you are self-employed, expect lenders to ask for additional documentation. They require proof of income, such as a statement from your accountant covering 2 to 3 years of your accounts.
How To Calculate How Much House You Can Afford
To produce estimates, both Annual Property Taxes and Insurance are expressed here as percentages. Generally speaking, and depending upon your location, they will generally range from about 0.5% to about 2.5% for Taxes, and 0.5% to 1% or so for Insurance.
Front End and Back End debt ratios are to determine how much of your monthly gross income can be used for your mortgage debt and how much can be used to satisfy all your regular obligations . The 28% and 36% ratios are standard in the mortgage world, but lenders may have other combinations available, such as 33%/38%.
Mortgage Affordability & How To Qualify For A Home Loan
Purchasing a home is one of the most costly transactions people make. It entails ample financial preparation and commitment to make timely payments. Thus, long before you submit your mortgage application, its crucial to assess your financial eligibility and how much you can afford.
What does it take to qualify for a mortgage? Our guide will discuss vital factors that determine your mortgage affordability. Well also talk about the importance of maintaining a good credit score and how major credit issues hinder chances of favourable mortgage rates. Well give a rundown on the required debt-to-income ratio, deposit, and primary costs you must consider before taking a mortgage. If youre looking for effective government schemes, we also included a section on Help to Buy mortgage assistance programs.
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Increase Your Credit Score
Conventional loans often come with riskbased pricing, which means if your credit score is lower than 740, youll pay a higher interest rate on your loan.
Mortgage insurance costs also increase as your credit score decreases. These rising costs chip away at your housing price range.
Take steps to raise your score. It could mean you can lower your interest rate and therefore your monthly mortgage payments. And it could mean you qualify for a larger loan amount.
Youll also have a better chance of qualifying for a loan program with a higher debttoincome ratio if your score is higher.
Lifetime Individual Savings Account
You can take advantage of a Lifetime ISA to purchase your first home or build savings for your retirement. This government scheme is open to individuals who are 18 years old but not over the age of 40. It allows you to contribute up to £4,000 each year until the age of 50. The government adds 25% bonus to your savings and up to a maximum of £1,000 each year. The account also allows you to hold stocks and shares to boost your savings.
Account holders are allowed to withdraw from their Lifetime ISA under the following conditions:
- If youre buying your first house.
- If youre 60 years old and above.
- If youre terminally ill with less than 12 months to live.
On the other hand, if you make any unauthorised withdrawals, are required to pay a withdrawal charge. The current withdrawal charge is 20% but is scheduled to revert back to 25% on April 6, 2021. You may visit the official Lifetime ISA page for more details.
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Get Expert Advice Immediately If
- You need to borrow more than 4.5 times your annual income
- You are only using one income on your application
- You earn income through sources such as Benefits, Commission or Rental income
- You consider yourself to be on low income
If one or more of the above apply to you, its important to get expert advice before making an application. The right broker can help maximise your chances of approval based on your circumstance.
How Much Can I Borrow On 12k A Year
A lot of people in lower salary brackets believe that they wont be accepted for a low income mortgage, often because of misinformation or because they have been rejected by a lender in the past.
However, there are lenders that specialise in mortgages for borrowers on a lower wage.
Sometimes these mortgages can come with higher interest rates, so always speak to a mortgage broker before applying as they will have access to a range of lenders, some of which may be able to offer you a better, more affordable deal.
Take a look at the chart below to see how much you could borrow depending on your salary and potential income multiple.
As you can see, even a slightly higher salary can make a big difference:
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How To Use Our Borrowing Power Calculator
Your Mortgages borrowing power calculator considers a few important factors that can determine your borrowing capacity, or how much you would be eligible to take out on a home loan. If youre not sure, just put an estimate.
There are three parts to this calculator: Annual income, monthly expenses and loan details.
Annual income. The calculator will ask you to provide all your income streams including your net salary before tax, rental income, and any other regular sources of income.
Monthly expenses. Youll need to enter your overall day-to-day expenses, existing loan repayments and any other financial commitments such as insurance, additional superannuation contributions, and the combined limit of your credit cards and overdrafts.
Loan details. Lastly youll need to fill in the details of your loan including the interest rate and the loan term. Take note the calculator will estimate your borrowing power based on a fixed interest rate over a loan term.
How Your Existing Credit Card And Overdraft Limit Can Impact Your Borrowing Power
Lenders will consider any credit cards to be drawn to their full limit even if you have never exceeded the allocated credit limit or found yourself behind repayments. For example, if you have one credit card with a $10,000 limit and another with a $3,000 limit, the lender will write down a $13,000 debt against you.
This is why its important to close any unused credit cards or reduce the credit limit on cards youre currently using.
Its also important to tackle any outstanding credit card or other high-interest debts before applying for a home loan. Any red flags on your credit history can pose the risk of the lender denying your application.
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Should I Speak To A Mortgage Broker
Mortgage brokers remove a lot of the paperwork and hassle of getting a mortgage, as well as helping you access exclusive products and rates that arent available to the public. Mortgage brokers are regulated by the Financial Conduct Authority and are required to pass specific qualifications before they can give you advice.
Call or request a callback
Mortgage Advice Bureau offers fee free mortgage advice for Moneyfacts visitors that call on 0808 149 9177. If you contact Mortgage Advice Bureau outside of these channels you may incur a fee of up to 1%. Lines are open Monday to Friday 8am to 8pm and Saturday 9am to 1pm excluding bank holidays. Calls may be recorded.
Your home may be repossessed if you do not keep up repayments on your mortgage.
How To Calculate Your Home Buying Budget On A $50000 Salary
As you can see in the examples above, two different borrowers who both earn $50,000 a year could have very different home buying budgets.
To figure out how much house you can afford, you need to factor in your own income, debts, down payment savings, and projected housing costs like homeowners insurance and property taxes.
Remember, principal and interest on the mortgage arent the only costs youll pay each month as a homeowner.
Luckily, you dont have to do all that math on your own. You can use an online mortgage calculator one that includes taxes and insurance to estimate your monthly mortgage payment.
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What Monthly Expenses Do You Have
! Please enter an amount less than }.
Estimate your monthly expenses such as groceries, transportation, child care, insurance, shopping, media and regular contributions to savings.
Please do not include rent or housing expenses.
If you’re buying a home with a spouse, partner, friend or family member, include their monthly expenses as well.
If this amount is higher than your monthly income before taxes, please contact us to discuss your options.
Step 6 of 6
Future Changes In Your Income And Expenditure
A lender will also want to stress-test your finances to be satisfied that you will be able to cope with any changes in your expenditure during the term of your mortgage.
The lender will want to be assured you will be able to meet your mortgage commitments if there is an increase in interest rates, if one of the applicants were unable to work or if you were to have children.
Such stringent affordability assessments are performed to provide confidence both for the lender and yourselves that you dont run the risk of falling behind with your mortgage payments.
Lenders all use their own criteria for affordability assessments, therefore, you really need to speak to a specialist who understands all the different nuances. Make an enquiry and well have one of the advisers we work with give you the right advice.
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Can We Get A Joint Mortgage If One Or Both Of Us Has A Poor Credit History
A bad credit rating can, no doubt, cause problems with a mortgage application whether on a joint or sole basis depending on the type of issue youve had and when it was registered.
If youre applying for a joint mortgage with one bad credit applicant, the good news is there are some lenders who will look at applications from borrowers who have had credit issues in the past and a few bad credit mortgage lenders who specialise in these types of applications.
Certain specialist lenders will consider:
- Joint mortgage applications with Late payments
- Joint mortgage applications with Defaults
- Joint mortgage applications with CCJs
- Joint mortgage applications with Mortgage arrears
- Joint mortgage applications with Debt management plans
- Joint mortgage applications with IVAs
- Joint mortgage applications with Bankruptcy
- Joint mortgage applications with Repossession
Can I Use A Mortgage Calculator Based On Income +
You can gauge how much of a mortgage loan you qualify based on your income with our Mortgage Required Income Calculator. You will need to work backward by altering the mortgage cost and supplying details of your other financial commitments. The calculator will then reply with an income value with which you compare your current income.
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Who Can Help You In The Mortgage Market
There are many lenders in Canada serving the mortgage market: banks, other large financial institutions & mortgage brokers. Most mortgage brokers in your town or city have access to a broad range of local & nationwide lenders. A good mortgage broker is normally able to put you into a program at a competitive rate. Banks like the Bank of Nova Scotia are national and can also provide immediate financing for your loans. In practice, however, most buyers end up pre-qualifying with a bank or a realty institution through their real estate agent or mortgage broker. In that process, your needs and requirements are taken into consideration and matched with a lender that can provide the best service for you. In other words, you may end up with a completely different bank holding your paper than when you started. As long as the loan is backed and it meets your terms, you should feel confident in signing it.
How Much Can I Borrow
We calculate this based on a simple income multiple, but, in reality, itâs much more complex.
When you apply for a mortgage, lenders calculate how much theyâll lend based on both your income and your outgoings â so the more youâre committed to spend each month, the less you can borrow.
This calculator provides useful guidance, but it should be seen as giving a rule-of-thumb result only. Read more about what lenders look at in the How Much Can I Borrow? guide
IMPORTANT! Please read…
This information is computer-generated and relies on certain assumptions. It has only been designed to give a useful general indication of costs.
It’s important you always get a specific quote from the lender and double-check the price yourself before acting on the information. We cannot accept responsibility for any errors .
How this site works
We think it’s important you understand the strengths and limitations of the site. We’re a journalistic website and aim to provide the best MoneySaving guides, tips, tools and techniques, but can’t guarantee to be perfect, so do note you use the information at your own risk and we can’t accept liability if things go wrong.
MoneySavingExpert.com is part of the MoneySupermarket Group, but is entirely editorially independent. Its stance of putting consumers first is protected and enshrined in the legally-bindingMSE Editorial Code.
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Is A Joint Mortgage A Good Choice For Couples
We receive lots of enquiries asking for more information about joint income mortgages. It may be that youre a first time buyer looking to make your first purchase as a couple, remortgaging from single to joint applicants or purchasing a buy to let property with your business partners.
Joint income mortgages are not just for married couples. There are lots of different options available across a range of permutations. Once youve digested the information below its vital you make an enquiry with us, so we can arrange for a specialist we work with to contact you directly.
What are you looking for?
How joint income mortgages work.
Calculating The Income Required For A Mortgage
You’ve got a home or a price range in mind. You think you can afford it, but will a mortgage lender agree? Or you want to take cash out for a refinance and are not sure what loan amount you can qualify.
Mortgage lenders tend to have a more conservative notion of what’s affordable than borrowers do. They have too, because they want to make sure the loan is repaid. And they don’t just take into account what the mortgage payments will be, they also look at the other debts you’ve got that take a bite out of your paychecks each month.
- FAQ: To see if you qualify for a loan, mortgage lenders look at your debt-to-income ratio .
That’s the percentage of your total debt payments as a share of your pre-tax income. As a rule of thumb, mortgage lenders don’t want to see you spending more than 36 percent of your monthly pre-tax income on debt payments or other obligations, including the mortgage you are seeking. That’s the general rule, though they may go to 41 percent or higher for a borrower with good or excellent credit.
For purposes of calculating your debt-to-income ratio, lenders also take into account costs that are billed as part of your monthly mortgage statement, in addition to the loan payment itself. These include property taxes, homeowner’s insurance and, if applicable, mortgage insurance and condominium or homeowner’s association fees.
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How Can You Estimate An Affordable Property Price
Take 30% of your annual gross income, equate this into a loan amount using an average rate of 2.75%, factor in a 10% deposit, and then use these calculations to estimate a potential purchase price.
Assuming that you dont have any debts or liabilities, and using a rate of 2.75% over a 30-year loan term, here are 3 potential scenarios:
Scenario 1: $50k income
- $50,000 annual gross income at 30% = $1,250 per month.
- With a mortgage at 2.75% p.a. this equates to a loan amount of $305,000.
- With a 10% deposit contribution worth around $34,000, the maximum affordable property price would be $339,000.
Scenario 2: $75k income
- $75,000 annual gross income at 30% = $1,875 per month.
- With a mortgage at 2.75% p.a. this equates to a loan amount of $460,000.
- With a 10% deposit contribution worth around $51,100, the maximum affordable property price would be $511,000.
Scenario 3: $100k income
- $100,000 annual gross income at 30% = $2,500 per month.
- With a mortgage at 2.75% p.a. this equates to a loan amount of $614,000.
- With a 10% deposit contribution worth just over $68,000, the maximum affordable property price would be $682,000.