If you buy a property anywhere in the world, unless you are extremely fortunate, you will most likely need to use some form of home loan from a mortgage lender. It may seem self-explanatory to some people but what is a mortgage lender really? And what does it mean to purchase a property through one? In this blog post, mortgage lender experts will answer some of the internets most searched terms relating to mortgage lenders.
What Do Mortgage Lenders Look For?
So, what is a mortgage lender? In simple terms, a mortgage lender is the organisation that provides you with the monies for a mortgage. Usually this is a bank or a building society. As of May 2021, there were more than 45 building societies and 300 banks in the UK, making it the biggest banking system in Europe and the fourth largest in the world. The main difference between a bank and a building society is that building societies are owned and run by their members whereas banks are owned by shareholders.
A bank or building society will lend money from their own reserves to a person or business that doesn’t have enough money themselves so that they can purchase a property. The client will then be in debt to the bank or building society and will be expected to pay back the loan eventually. You will decide how long you want to borrow the money for in years and months at mortgage application stage. Generally, this can be anywhere between 5 and 40 years.
In most cases you will be charged interest on the loan every month that you have it so that the bank or building society can make a profit. If you choose to repay the mortgage monthly, you will pay a monthly repayment amount as well as interest per month to the bank. Alternatively, you can choose to only pay the interest per month however you will still need to pay back the loan at some point in its entirety.
How Much Will Mortgage Lenders Lend and How Do Mortgage Lenders Work Out Affordability?
Banks and building societies are notoriously cautious, especially after the financial crash of 2008. When applying for a mortgage, your borrowing ability (how much you can borrow from the mortgage lender) will be tested based on several factors. You will not necessarily be able to borrow any amount of money you want. First and foremost, mortgage lenders will roughly be willing to lend you between 4.5 and 5 times your annual income as a mortgage. So, for example, if you earn £50,000 a year basic salary, you will roughly be able to borrow around £225,000 to £250,000. However, things with mortgage lenders aren’t as black and white as that.
Sometimes mortgage can lend more or less than 4.5 to 5 times your income depending on their own internal affordability checks and depending on your own financial situation. If, for example, you earn £50,000 a year as a doctor but every 2 years you are guaranteed to progress to another pay grade and you have this in writing in your contract, a mortgage lender may be able to be more lenient with your salary and affordability. In contrast, a mortgage lender will lend you less if you have a lot of credit commitments.
By this, we mean that if you have outstanding credit card balances or loans or hire purchases that means that you are paying back debt per month, a mortgage lender will take this into account and will reduce the amount they are willing to lend you. Each mortgage lender looks at credit commitments differently and each one will give you a different lending figure based on their own criteria. The best thing to do is to speak to a mortgage advisor who will help get you the most lending with the best lender.
So far, we have only spoken about basic income. If you have any extras on top of your basic salary such as bonuses, overtime, commission, allowances, these can also increase your borrowing potential. With most mortgage lenders, if your extra income is a guaranteed amount e.g., guaranteed extra £6,000 a year car allowance, then they will often accept 100% of this income for the affordability.
If you extra income is not guaranteed or not a guaranteed amount e.g., performance-based bonus or commission that fluctuates, they will often accept 50% of the income and will need to see a track record of receiving this (each lender has different requirements). Again, speaking to a mortgage advisor to find the best lender is a necessity.
If you are self-employed, things are a little different. The mortgage lender will still take into account your credit commitments however as you are not employed, they will either look at your net profit or your salary and dividends to assess your borrowing potential depending on if you are a sole trader or own a limited company. If you are a sole trader, the mortgage lender will generally take your last three years net profit figures and work out an average of the three to use as your income e.g., if you earned £30,000 in 2019, £32,000 in 2020, and 35,000 in 2021 the lender would assess your income at £32,333.33.
If you are a limited company director, they would look at your limited company accounts for the last three years, take your directors salary and directors dividends figures for the last three years and average them out again. With either scenario, if your latest years figures are lower than the previous year, the lender will use the lower figure. In some circumstances, there are lenders who will use the latest years income figures only, however this is very rare nowadays.
How To Choose A Mortgage Lender
Speak to a mortgage advisor. It’s as simple as that. The absolute best thing you could do before getting a new mortgage is to speak with an advisor who is experienced and will know what is best for your circumstances. Most mortgage advisors will offer a fee free initial discussion where they will talk you through your situation and recommend a plan of action. By speaking to a mortgage advisor, like Oportfolio, you will open up your mortgage options greatly rather than limiting yourself to your local bank.
An advisor such as Oportfolio has access to over 90 different mortgage lenders and they will use their years of experience to find you the best lender, the best rate, the best borrowing potential, and the smoothest route forward. Everyone’s circumstances are different and there is no template to follow when applying for a mortgage which is why speaking to an expert is highly advised.
Which Mortgage Lenders Accept Defaults And How Far Back Do Mortgage Lenders Look On Your Credit File?
As well as assessing your income and borrowing potential, a mortgage lender will also check your credit before making a decision to lend to you. This is to make sure that you can manage the large mortgage debt and don’t have a high risk of defaulting on your payments. To be completely transparent, most high-street banks and building societies such as Santander, Halifax, NatWest, Nationwide, Barclays do not look kindly on people with less than perfect credit.
With these lenders, they need your to have had no credit issues or mishaps for at least 6 months but potentially even longer. For small discrepancies like missed payments on a phone bill, some of these banks will just need these to be paid up and settled for at least three months however more serious issues like defaults and County Court Judgements will need to be paid off and cleared for longer.
For major credit issues such as Bankruptcies, IVAs, and repossessions, all these lenders will either need you to have cleared them 6 years ago or may not be willing to lend to you at all, regardless of the time that has elapsed. If you have recent or ongoing credit issues, that doesn’t necessarily mean that you can’t get a mortgage however you may need to go to a more specialist lender who deals mainly in credit impaired mortgage applications. Some examples of specialist credit impaired mortgage lenders are Precise mortgages, Pepper Money, The Mortgage Lender & Kensington Mortgages. Most of these are only accessible via a mortgage advisor.
Again, no mortgage application is exactly the same and the lender that you can go to depends on your own circumstances. A mortgage advisor with access to specialist lenders will be able to take an in-depth look at your credit file and determine the best route forward. With all mortgage lenders, they will take a look at your credit file and make a lending decision based on your credit conduct.
When Do Mortgage Lenders Do Credit Checks?
When you have had your initial mortgage affordability and suitability discussion with your mortgage advisor, they will run a preliminary credit check with their recommended lender which is all done online and normally gives a result within a few minutes. If your credit check passes, then a more in-depth check will be done by the bank at application stage. If your credit check does not pass first time round, your advisor will advise you on the next course of action.
What Do Mortgage Lenders Look For In Bank Statements?
As standard practice when you apply for a mortgage, lenders will generally ask for four essential documents.
- ID (Passport, driving licence)
- 3 Months Bank Statements
- 3 Months Payslips or Proof of Self-Employed Income (as mentioned above)
- Proof Of Deposit (if you have one)
All these documents will be assessed by an underwriter at the bank or building society so that they can determine if they are happy to lend to you. ID is of course used to make sure that you are who you say you are, proof of income is used to make sure that you earn what you say you do, and proof of deposit is to make sure that the funds you are using to put down as a deposit are coming from a good source and are available when needed. With the bank statements, these are a lot more important than you might have initially thought.
The mortgage lender will ask to see the latest 3 months bank statements for each applicant to confirm and assess a few things.
- Proof of address
- Proof of income being received
- Proof of satisfactory credit/credit commitment conduct
Proof of address: The bank will check the address on your bank statement and your name to make sure that you are receiving official documents in your name to the address that you have disclosed as your primary residence. If you submit a bank statement and your name is spelt differently or your address is different to the one that has been disclosed on your mortgage application, this will be an issue.
Proof of income being received: Despite having your payslips or tax documents, the lender will also look at your bank statements to make sure that the money that is being paid into your bank account matches to the amount that is on your income documents. If there are any discrepancies such as receiving more or less income into your account, this could indicate mortgage fraud, tax fraud or some other illegal activity and your application will be cancelled and you may be reported.
Proof of satisfactory credit/credit commitment conduct: This is probably the most important job of the bank statements in your mortgage application. The mortgage underwriter will assess what your outgoings are, make sure that all major credit commitments on your bank statements have been listed on your application and included in your affordability. If there are any undisclosed credit commitments, then these will be picked up by the underwriter and could affect your borrowing potential.
They will also make sure that there is not too much activity such as gambling which reflects negatively on your overall application. If an underwriter looks at your bank statements and sees regular betting or gambling (especially if you are losing more than you are earning) they may reject your application.
When you speak to your mortgage advisor, they will look through your bank statements pre-application much like the underwriter will and will make sure that there are no issues before submitting your application. If there are, they will advise you of what your next step will be.
Mortgage Deposits And Which Mortgage Lenders Accept Gifted Deposits?
Deposits are a big deal to mortgage lenders and making sure you have enough and from the right source is very important. Unfortunately for some, most mortgage lenders will need at least 10% deposit when you apply for a mortgage i.e., 10% of the value of the property will need to be paid from your own money and the bank will provide the other 90%. Some lenders are starting to offer 95% mortgages again, but these have been massively reduced since the COVID-19 pandemic.
If your deposit money is simply coming from your own personal savings in your bank account and the lender can see that you have been adding to your deposit over a period of months or years, then this is usually very quickly accepted and approved by the mortgage underwriters. But what if your deposit isn’t coming from your own savings? Some deposits may be coming as a gift, a loan, sale of another property or from investments such as stocks and shares.
The good news for people who are getting a gifted deposit is that most main lenders like Santander, Halifax, NatWest, Nationwide, Barclays all will accept gifted deposits. However, the source of the deposit will be assessed by the underwriter to make sure that it is coming from a genuine source and is available when needed. Firstly, your deposit will generally need to be gifted by a close family member (parents, grandparents, siblings etc.)
The lender will normally want to see an audit trail of where the funds originated from so, they will need to see the gifter’s bank statements for the last 3-6 months. They will also most likely need a gifted deposit letter from the donor which confirms that the deposit is a non-refundable gift to the mortgage borrower. Some lenders will have their own gifted deposit template for you to use. If either of these is unable to be completed, your mortgage application may not be accepted.
At the moment, there is only one mortgage lender who will accept a loan as a deposit. As your full house purchase will essentially be 100% funded by loans, most mortgage lenders see this as being high risk. The only lender who will accept a loan as a deposit is Santander. Although, it is not as simple as that. Santander will take the loan as a deposit however they will also include the repayment of the deposit loan into account as a credit commitment in your mortgage affordability, potentially reducing the amount they are willing to lend you. All of this will be assessed by your mortgage advisor prior to application if this is the route you want to go down.
When it comes to a deposit from the sale of a property, cashing in of stocks and shares or any other route where liquid cash is not immediately available, lenders will still need to see some form of proof of the funds. With the sale of a property i.e. selling one property to purchase another, they will normally need the original property to be sold subject to contract and will want to see the memorandum of sale from the estate agent confirming how much the property has sold for. They will also most likely need to see a mortgage statement from the original property to determine how much equity you will receive from the sale.
With cashing in stocks, shares, bonds, or anything similar, they will normally need to see some sort of recent statement showing exactly what the value of the investments are and will need confirmation in your mortgage application that you will be cashing the investments in. In some cases, they may need to see a statement prior to completion of the mortgage showing that the investments have been cashed in. There may be other acceptable deposit sources with some lenders, but these are the most common. If your deposit is coming from anywhere else, speak to your mortgage advisor.
How To Switch Mortgage Lenders
If you already have a mortgage and are looking to either change lender or change product to get a better rate with your current lender, doing this through a mortgage advisor is your most stress free and easiest option. With a remortgage (changing to a different lender) your mortgage advisor will ask you for similar documents to when you originally applied for the mortgage the first time.
As you already have a mortgage, and as along as you have kept up to date with the payments, remortgages are usually a lot easier and quicker to get applied for and offered. The mortgage underwriter will be able to see that you have already been accepted for a mortgage in the past and are a good candidate for a new mortgage. From start to finish, a remortgage can be applied for and offered in a week or less.
If you are happy with your current mortgage lender but just want to swap to a different product that they offer e.g., your original mortgage with Santander was at 2.65% but now they offer a mortgage at 2.20% then all you need to do is speak to your advisor and they will contact the bank to arrange the product switch. As you already have your mortgage with the bank, they already know who you are and class you as a trusted mortgage borrower (if you have kept up with your mortgage payments).
Lenders may as for an up-to-date bank statement and payslip just to confirm that your income hasn’t decreased significantly, and your outgoings haven’t massively increased. Often product transfers are assessed and offered even quicker than remortgages.
With either route, going direct to the bank is not advised even though it might seem like the easiest option. Banks and building societies will have long waiting lists and if you need a speedy remortgage or product transfer, the lender direct will not be able to give you a quick turnaround. An application submitted via a mortgage broker will have priority as the application will go through to the bank digitally and will be handled by a team of people who solely assess broker submitted applications.
Hopefully this blog has answered some of your questions regarding what a mortgage lender is and what kind of things they look for when you submit and application. If you would like to discuss anything from this blog at all or have any other mortgage related queries, please feel free to give our office a call today.