How Lenders Determine Your Mortgage Loan
Don't let the crisis fool you, new home mortgages are being written every single day. Many factors are used to calculate how much a lender is willing to loan you for the purchase of a new home. For the most part, we can place these factors into three categories: your income, how much the property is worth and their estimation of your ability to pay.
What You Earn
Every lender uses their own formula to determine how much they are willing to give you during the home buying process. However, you can estimate the amount that most lenders are willing to give by multiplying your annual salary by 3.5. Using this formula, an average salary of ?26,000 would qualify you for a ?91,000 loan. Lenders obviously take other factors like credit history into account when applying this formula.
Good credit and a skilled mortgage broker could increase this figure to between 4 and 5 times your average salary. Couples are typically able to get 2.5 times both annual salaries or 3 to 3.5 times the higher salary plus one year of the second salary. A couple where both people earn ?26,000 per year would be eligible for a loan of around ?130,000 using these formulas.
Competition between lenders is fierce. That means that they need your business to stay alive. Seek out an experienced, independent mortgage adviser to get a quick answer to how much you can borrow. Long standing relationships with local lenders and experience make them the ideal resource for accurately gauging your possibilities. The idea is that every borrower has unique circumstances. Take for example a family of 4 with lots of monthly expenses, they would not be able to borrow as much as a singleton with the same income.
How Much the Property is Worth
Each lending firm uses its own loan to value ratio as a guide for mortgage loans. This is usually a percentage which shows the size of mortgage against the property's value. For example, a loan to value ratio of 60% on a ?100,000 property would mean that your mortgage loan would be ?60,000. Some will lend up to 90 or 95% of the property's value, but 75% is the standard rate. But, for these higher percentages, you'll pay over the odds - ie a higher interest rate for this. You also probably be forced to buy mortgage indemnity insurance which is not advisable.
The value of the home is also measured against the value of the other properties located in the same area. Some lenders may refuse a loan if they feel the property isn't expensive enough for the area. More often, it's the opposite case - where a property is seen as too expensive.
The Lender's Opinion of Your Ability to Pay
Provide proof of rental agreements that match the amount of the intended mortgage if you are a first time buyer. Providing this type of information helps convince the lender that you will be able to cover the payments. Note that how much you can borrow is not necessarily what you can afford.
You may be able to get a mortgage which stretches your budget to the limit but leaves you in trouble when you have to pay the other costs involved in buying your home and its future running costs. Some lenders may try to estimate this by checking your average outgoings such as your household bills, debts or similar expenditures by having you fill in a detailed questionnaire either by hand or on the phone or online etc.
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