The mortgage lending process has recently changed with the aim to ensure that those people who apply for a mortgage application can actually afford the costs, especially if the cost of the mortgage was to rise in line with an increase in the mortgage rate.
Previously a mortgage application only had to prove that the money they were borrowing was affordable. Now, under the new guidelines the customer applying for the mortgage needs to show that they can afford the mortgage even if there is an increase in the mortgage rates.
The new range that a customer has to prove they can afford is 7%, which is about a 3% increase on the current rate. This requirement will mean a more in-depth study of the money coming into your home and the amount of money that you currently spend.
Creating A Budget
It is important that before you even attempt to apply for a mortgage, you consider your current financial situation. If you are looking to purchase a home for the first time with a partner, then you will clearly need to show a budget that combines both the incomes.
If the mortgage is going to reflect one income then this will need to show the affordability in the budget to live adequately on the sole income. A mortgage lender is not able to use benefits as part of the income because these are subject to change.
You will need to provide a clear budget on the amount of money you have coming in and the amount of money that you have going out each month. The mortgage provider will also look at the income and out goings that show on your bank statements, they won’t take your word for the amount you spend, they will want proof.
It might be an idea before starting an application for you to check your credit file in case there are any anomalies, which need correcting before putting in your mortgage application. These can affect the outcome of your application and it will reduce your credit rating if the mortgage company declines your application.
Why The Change
The change has come into force because of the mess the mortgage lending had become with lenders lending the full value of the home, plus more. This meant that many people, after the crash, are living in homes where they owe more on the mortgage than the value of the home.
If you are in this situation you are going to find it impossible to change mortgage providers, no mortgage provider is going to take on such a debt in the current market, because if you happen to fall behind in payments there is nowhere for them to go to claim the money owed on the mortgage. The sale of the house will not cover the debt.
Therefore, you will only be able to sell the property for a loss and then you will need to find a home that the mortgage company is willing to take on, plus the original debt.
The new stricter guidelines, which the mortgage companies are using, are to help reduce the possibility that if there is a rise in the interest rates in the future, those people with mortgages will be still able to afford the payments.
This extra work for the mortgage application means there is a delay in the application process and this can increase the application by up to two weeks.
What The Mortgage Application Might Look At
Some key areas a mortgage company are going to look at to consider the approval of your application are:
- Childcare costs
- Season ticket holder
- Regular beauty care like hairdressing cost
This might seem intrusive but they are ensuring that you can afford the debt now and in the future. It is showing that they are able to lend money sensibly to those people who can afford it.
Therefore, whilst for some people it might seem that the mortgage company is going into too much detail, on the other hand if a loan approval goes through and the client is unable to pay, both parties are at risk. By ensuring, the risk is low, this means limiting the likelihood of a person failing to pay.