What Do Mortgage Lenders Look For When It Comes To Eligibility?

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The process of buying a home carries a lot of mixed feelings. On one hand, you’re excited about owning your dream home and turning that “For Sale” sign into a welcome mat. On the other hand, you might be worried about the process of securing a mortgage, especially if it’s your first time going through it.

Since the mortgage loan is probably the biggest amount borrowed you’ll ever undertake, it’s natural that lenders will need to assess your financial suitability carefully. But what exactly do mortgage lenders look for?

Here, we’ll break down the key factors and eligibility criteria that mortgage lenders look for while evaluating a borrower’s application. 

Why Eligibility Screening Matters For Mortgage Lenders

A mortgage loan is a significant financial and legal commitment for both parties involved in the agreement. As such, lenders will try to reduce the risk of missing repayments by carefully assessing each application and checking all the risk factors that could increase that risk.

This helps them establish a solid borrower’s financial history with enough income to comfortably handle the repayments, along with a sufficient down payment to mitigate potential losses if they had to foreclose the property.

Although this process is time-consuming and resource-intensive, screening out ineligible borrowers early on saves lenders a lot of money in the long run, as it significantly reduces potential losses due to defaults.

In addition to the previous factors, the scrutinising assessment process also contributes to the lender’s overall reputation, as it deters potential scams and fraudulent activities looking for an easy target.

What Are the Eligibility Criteria That Mortgage Lenders Look For?

Mortgage lenders assess a wide range of aspects while checking whether an applicant qualifies for a mortgage. 

While the exact process may vary from one financial institution to another, the overall process is generally the same across all lenders. Here’s a brief overview of the most critical of these qualifications.

1. Credit History & Score

One of the most crucial factors influencing your mortgage eligibility is your credit history and score. What makes this one exceedingly critical for your application is that it gives a comprehensive overview of your financial responsibility and how you’ve managed debt in the past.

Lenders look for a history of on-time payments for your financial obligations, mainly credit card debts and loan repayments.Besides being highly established and easily documented, lenders also value this aspect because it’s highly quantifiable.

Credit reference agencies like Experian and Equifax can generate credit scores for any potential borrowers based on their credit history, giving lenders a massive head-start in their verification process.

2. Down Payment & Property Value

Besides creditworthiness, lenders will also keep the size of the mortgage you’re applying for in mind, as it can heavily impact your eligibility. For instance, even with relatively good credit, taking out a larger loan involves a higher risk of default, so lenders will assess your ability to repay the loan based on your current income and your ability to fulfill long-term commitments.

As a general rule, there isn’t a set maximum loan size for a mortgage, but lenders typically have internal limits based on your financial situation.They typically have a maximum loan-to-value ratio, commonly known as LTV. This one links the loan amount to the property’s value as a percentage. 

Most UK lenders will offer a maximum LTV of 85% to 95%. This means that your down payment should typically be between 5% to 15%.

3. Employment Status & Total Income

Along with the loan size you’re requesting, lenders will naturally consider your income to assess your affordability. Simply put, they want to see evidence of stable and sufficient income to cover your monthly mortgage payments alongside your other living expenses.

First, lenders will typically assess the type of your income, such as salary, pension, or self-employed income.

The nature of your work and employment history also matters to your lender, as it gives an idea about your ability to maintain a stable income stream.For example, having a stable job with a consistent income is quite favourable while frequent job changes and short work stints could raise some concerns while assessing your application.

Be prepared to provide proof of income documents, such as payslips or business financials and tax returns if you’re self-employed.

4. Debt To Income Ratio

The debt-to-income ratio is another highly critical metric lenders use to gauge your financial stability. Similar to credit score, this metric is also highly quantifiable, which makes it easy to generate and interpret by risk assessment officers.

This ratio describes how much of your gross monthly income goes towards servicing your existing debts, which is typically expressed as a percentage of your after-tax income.

It typically includes your minimum payments for credit cards as well as different types of loans and financial obligations, so it’s common to include mortgage and rent payments in this metric as well.

A lower debt-to-income ratio means a higher portion of your income is available for mortgage payments, increasing your eligibility as a borrower and reducing your interest rates. For instance, anything below 25% is considered low-risk by most lenders.

Most lenders in the UK prefer this ratio below a certain threshold, typically around 45%. However, this can vary depending on the lender and the type of mortgage you’re applying for.

5. Spending Habits

Lenders won’t only be interested in knowing how much you earn, but also how you manage your finances and what you typically spend money on. In fact, showing that you’re a responsible spender can massively boost your eligibility assessment during the pre-approval process. 

On the other hand, any large, unexplained outflows or recurring payments could raise a lender’s concerns about your ability to manage a mortgage alongside current expenses. As a general rule, expect your lender to request a bank statement for the past 3 to 6 months to assess your spending patterns.

6. Additional Assets & Investments

If you have a healthy portfolio of assets or investments, make sure that you include them in your mortgage application. Besides demonstrating your strong financial foundation, they also show your ability to weather unexpected situations or changes in your employment status.

Frequently Asked Questions

What is the most important factor for mortgage approval?

It’s generally difficult to pinpoint the single most important factor for mortgage approval because lenders consider a wide range of factors while assessing financial eligibility. In fact, if you have a perfect score in one aspect and poor results in others, the overall assessment will typically come back with generally negative remarks.

That being said, if we’re talking about the most influential factors among others, credit score and debt-to-income ratio would stand out as vastly critical for lenders.

How long does the pre-approval process take?

The eligibility assessment process is one of the most critical and longest steps during the pre-approval process. While the complexity of your application can affect the timing, you should expect the process to take anywhere between 2 to 6 weeks. The exact estimation also varies depending on the mortgage provider and their application processing speed.

How much money should I save for a down payment?

As a general rule, most lenders in the UK will require a minimum down payment of 5% of the total purchase price for the property. For example, if the property you’re trying to buy is worth £250,000, you’ll need a minimum deposit of  £12,500. 

That being said, some mortgage lenders will require up to 15% down payment, especially for first time buyers, which raises the deposit in the previous example to £37,500.

Can I still get a mortgage with bad credit?

Even with bad credit, you might still qualify for a mortgage. However, the interest rates and fees could be anywhere from fairly to significantly higher depending on your situation, as lenders will then see you as a bit more risky.

What are some red flags that could affect my application?

There are various risk indicators that you might think are harmless but may have a negative impact on your application assessment. These aspects and their influence can vary significantly from one lender to another, but they include items like:

  • Gambling
  • Taking out payday loans
  • Unreferenced or unclear payments in your account
  • End-of-month overdrafts
  • Specific purchasing patterns, such as luxury items or collectables.

Does a declined mortgage affect my credit score?

A single past mortgage application likely won’t derail your credit score, as being declined doesn’t usually show in the report. However, an unsuccessful application typically leads to multiple attempts within a short timeframe or applying for other credit products like loans or credit cards. 

Overall, this might suggest to the lender that you’re struggling financially and seeking additional funds, which increases your overall risk as a borrower.

Final Thoughts On Mortgage Eligibility

As you can see, mortgage lenders have a complex screening system to assess your eligibility when you apply for a mortgage. Besides these common aspects, lenders can also check specific aspects related to each individual case.

That’s why having professional mortgage brokers by your side is essential to give you a preliminary assessment before actually applying for a mortgage. Contact When The Bank Says No now to get expert-level assistance with your application!

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Emma Jones
Emma Jones
Emma began her career in Lloyds Banking Group, first in the unsecured & secured loans department at Halifax and later as a mortgage advisor at Lloyds. During 9 years in these roles and a further 2 years at Yorkshire Building Society, Emma was able to observe the impact of the recession, and how the banks let their customers down by denying loans and mortgages. Wanting to be a driving force for change, she stepped into a market advice role where she has been able to help clients when others couldn’t. Identifying a gap in the mortgage space, Emma went on to establish When the Bank Says No. As a keen property investor, she has been the focus of features in publications including The Sunday Times and This is Money. Emma’s greatest joy is overcoming the low expectations of their customers, many of whom have all but given up on getting a mortgage due. One thing Emma has learned through her own personal struggles is every client must be treated like a human and understood better by advisors and lenders in the industry. “We all have to navigate life events which can ultimately impact your financial status. It shouldn’t mean dreams of homeownership or business growth should have the breaks applied”. Emma and her team’s passion for helping people overcome the challenges they may face when applying for a mortgage have fuelled the success of When the Bank Says No.

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