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How Do Lenders Assess Borrowers?

Each mortgage is a risk for the lender, and they have to assess that risk and see if it is worth lending out the money. There is always a chance that the borrower will default on repayments, and the lender aims to minimise this chance by only lending responsibly.

This theoretically protects both the lender from losing their money, and the borrower from getting into a difficult financial situation.

There are some key factors that lenders look at before lending out to a borrower, but there are no guarantees which factors they will look at, and in the majority of cases, banks will not publish exactly what they assess when looking to lend.

Income when applying for a mortgage

One of the most obvious factors that lenders will look at is the income of the person wishing to borrow.

In almost every case, a person will need some form of income to make monthly repayments on money borrowed. The lender will look at a person's income and calculate how much they will be willing to let that person borrow, estimating how much they will be able to pay back per month.

Income is not necessarily just the wage slip people get at the end of the month. The lenders will also look at:

  • Income from investments
  • Income from pension
  • Income from child maintenance or grants
  • Any other forms of repeated income

From this information, the lender will work out your loan-to-income ratio. This is usually a multiplied amount (usually three or four times) of your annual salary, and it is used to estimate a sensible amount to lend.

For example, a person earning £30,000 a year may be given a loan-to-income ratio of £120,000 (four times their annual income).

Since 2014, there has been a cap instigated on the loan-to-value ratio of four and a half times the annual income of the applying borrower.

When multiple people apply for a mortgage together, it can boost the amount that will be available for them to borrow. A joint income will also make it easier to afford not only the repayments, but the costs of living, and is more likely to leave extra as disposable income.

The flip side of looking at an applicant's income, is also looking at the out goings of each individual.

Outgoings when applying for a mortgage

The outgoings of a household are taken into account when an applicant applies for a mortgage. A lender is not going to expect a person to spend 100% of their income on paying back their mortgage. After all, people need to eat.

Various living and personal expenses are calculated or estimated and taken into account during what is called an affordability assessment. After a comprehensive review of the mortgage market in 2014, the Financial Conduct Authority (FCA) made changes which meant lenders had to more closely scrutinise the outgoings of applying borrowers.

With outgoings calculated, it is then possible to work out what sort of monthly payments the borrower could afford.

Credit History and Rating

A lender will make use of something called a credit history in order to help decide if a borrower is reliable and likely to repay on time.

Your personal credit history is determined by your past loans, how often you have defaulted on a loan, any payday loans taken out, as well as various other factors.

Check out the page on credit ratings to find out more information.

Stress testing the finances of a mortgage applicant

The FCA have also made it mandatory for lenders carry out a stress check on people looking to borrow money on a mortgage. This means that lenders have to look ahead and predict if, in the event that something happens to impact the finances of the applicant, whether they will be able to cope reasonably well and recover without being put in a precarious position.

For example, whether the borrower would want to have a child, and the mortgage lent would have to be adjusted accordingly to ensure that the borrower could keep up repayments.

Electoral roll

A lot of things can affect whether a person is considered a risk or not by a lender. One of the most surprising reasons is whether you are on the electoral roll or not.

This is because it makes it much easier for the lender to check out a person's legitimacy. If a person is on the electoral roll, it is much easier to check their address, and therefore lessens the likelihood that the individual applying is fraudulent.



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