How Loan Providers Calculate Mortgages

mortgage payments

The modern economic climate is a volatile and uncertain one and has made many mortgage providers think more carefully about who they will and will not lend to. This is not just to protect themselves, but also to prevent anyone finding themselves with a mortgage they cannot afford. There are a number of important deciding factors that a mortgage provider will take into account before making an offer to an applicant. These are designed to let the mortgage provider assess whether a borrower can afford their repayments month by month, whether a borrower is a good long-term risk and whether the property the borrower wishes to purchase or borrow money against is worth enough to cover the loan if the worst should happen and repayments fall behind.

Before making a mortgage application it is well worth someone considering taking out a mortgage looking into these factors and ensuring all the information the mortgage provider might need is readily available. To some extent the mortgage provider’s requirements will depend on the borrower`s circumstances. Someone who has a large deposit against the total price of a property may not need to have the same criteria as, for example, a first time buyer with a minimal deposit. The first thing that most providers will be interested in is the total income of the applicants and evidence of that income in the form of payslips, annual accounts, P60s and so on.

All mortgage providers have a set amount they will allow someone to borrow based on their income. These limits are known as income multiples and will differ depending on what the annual income is (some multiples will be higher for higher owners, up to as much as four times the annual income), whether it is a single or joint income and whether the applicant`s credit rating is scored as low, medium or high. As ever, it is worth checking with credit reference agency records that there are no anomalies or inaccuracies before making any credit application. Even the highest earners may be living beyond their means and so mortgage providers will expect to have a record of day to day living expenses, usually for a monthly period.

This will then be looked at in conjunction with the applicant`s income to see how much money is available on a monthly basis to make a mortgage repayment. It is vital that the applicant is honest with themselves at this stage to prevent future problems. If the mortgage company sees that the loan is either barely or totally unaffordable the loan will never be approved. The other main factor for a mortgage company to consider is loan to property value.

These loan to value comparisons are important and mortgage companies will expect to see a proper property valuation. Simply put, the mortgage company will compare the loan, or amount you wish to borrow in total, against the valuation of the property. They will be looking for a certain ration, which can differ, to give some comfort in the form of security. Some mortgage providers will not lend more than 85% of the property’s value, while some may go as high as 95% in certain circumstances.

There are many available mortgage cost calculator tools that can be used to help someone assess whether their application is likely to be successful and to give an insight into what products might be available to them.

Another post from Gina Wilson – Credit & Loans Specialist Blogger.

About the Author

Gina Wilson
I am an ex banking professional with over 6 years in credit administration and an avid blogger that writes useful posts to help those that want to navigate today's crazy world of mortgages, property loans and credit.

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