New mortgages are still being granted every day, even with the global crisis in full swing. A variety of factors are examined when a lender is deciding whether or not to grant your home loan. These factors usually fall into 1 of 3 categories: how much you make, how much the property is worth and how much they think you can afford.
What You Earn
Each lender decides what formula to use when deciding on the loan amount. For a quick estimate of the average loan amount, multiply your annual salary by 3.5. That means that an average salary of £26,000 would qualify you for a loan of around £91,000. However, debts and a poor credit history may lower this figure substantially.
Some savvy buyers may even receive between 4 and 5 times their annual salary. Lenders often offer 3 to 3.5 times the higher salary plus 1 year of the second salary when dealing with couples. A couple where both people earn £26,000 per year would be eligible for a loan of around £130,000 using these formulas.
Though they try to make it seem like you have to go through a gauntlet to get the money, competition between lenders is actually quite fierce. They really do need your business to keep their doors open. The best way to find out how much you can borrow is to find an independent mortgage adviser with experience in the local market. They usually have long standing relationships with the mortgage lenders and know exactly what you can stretch to. Lenders are aware that every borrower's situation is unique. A single person with no debts would be able to borrow more than a couple with the same salary but with teenaged children for example.
How Much the Property is Worth
Lenders use a specific “loan to value ratio” to determine how much they are willing to lend. This is usually a percentage which shows the size of mortgage vs 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. While most lenders offer up to 75%, some go as high as 90% or 100%. However, the higher the percentage, the more you will likely pay in interest rates.
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.
How Much the Lender Believes You Can Afford
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. Bear in mind that the final loan amount may not be congruent with what you can actually afford.
You may be able to get a mortgage that taxes your budget to the very limit, but gets you into trouble when other costs involved in the buying process appear. You should also take into account the future maintenance, taxes, insurance and other related costs when determining how much you can afford on your new home. Some lenders will want to estimate this by checking your average outgoings eg your household bills, any debts etc. Some will get you to fill in a detailed questionnaire either by hand or on the phone or online etc.
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