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How do lenders work out how much they will lend?

All work on some form of credit scoring in which your income, credit history, age, address, marital status and so on contribute points. The total determines whether an application will be approved or declined.

Some use income multiple calculations. For example, Barclays can offer up to four times your salary if you apply on your own. If you're applying jointly you could get up to three times joint salary or four times the first salary and one times the second.

Many lenders also use affordability calculations to make lending decisions. This involves looking at your monthly outgoings, including debt repayments, utility bills and 'lifestyle costs' such as eating out.

What if I am self-employed?

Policy will vary between lenders so ask around but most lenders ask for verification of your income. If you're self-employed lenders will usually ask for evidence of your earnings, such as two years of trading accounts. Your application will often need to include evidence of a track record in a particular field.

I have a bad credit history

If you have a County Court Judgment (CCJ) against you for a debt you failed to pay promptly, for example, you may not be turned away by high street lenders if you paid it off more than a year ago.

If it has been less than a year, or if it is still 'unsatisfied' (outstanding), you may have serious difficulties getting a mortgage. CCJs remain on your credit record for six years.

If you can get a mortgage, it may only be from what are known as 'sub-prime' lenders. Those borrowers with adverse credit and CCJs may be charged higher rates (historically about 1.5-2% above base rate) to reflect the potentially greater risk of repayments being missed.

These kinds of mortgages are becoming increasingly mainstream and thus competitive so rates are slowly coming down. But sub-prime mortgages often carry large arrangement fees - five or six times the norm.

Always get some advice from a mortgage broker or mortgage advisor though as there are more options available to you than there were a few year’s ago.

Why else might I be turned down?

Bad credit history is the biggest but other classic reasons for an application being declined include:

• Length of employment
• Not being on the electoral roll at your previous address
• Property value
• Construction - many don't like lending on older concrete buildings, for example
• Location - flats above shops or ex-local authority sometimes have difficulties
• Short leasehold

How much deposit do I need?

The minimum deposit depends on who you arrange your mortgage with – it is usually between 5% and 10% of the property's value. Some lenders won’t ask for a deposit (often called 100% mortgages) but please be aware you will be charged a higher rate of interest as the lenders consider it a greater risk.

If you can put down a bigger deposit, you might find you are offered a better rate of interest. Plus you could avoid paying a higher lending charge (this is the fee charged by some lenders to protect them in case you can't keep up the repayments on your mortgage).

Check your credit rating

We recommend you check your credit report before applying for a mortgage. If you've had problems with your credit in the past, even a few missed payments on your credit card for example, this may reduce how much you could borrow. The first thing to do is to contact the credit reference agency and ask for details of your credit file, which they have to provide by law. Propertyfriends.co.uk recommend two credit reference agency’s - www.experian.co.uk or www.equifax.co.uk Once you have all the details, you can then sit down with your mortgage broker or mortgage advisor and get some helpful advice. You can also check your credit file online at www.creditexpert.co.uk this service will also alert you via email and sms when a change has been made to your credit file.

Agreement in Principle

To get a better indication of how much you can borrow, you can arrange what lenders often call an ‘Agreement in Principle’. This involves getting more details about you and running a credit check.

There are three good reasons to arrange an Agreement in Principle:

• When making an offer on a property, you'll have the confidence that you can realistically put your money where your mouth is. Just bear in mind that the Mortgage in Principle is likely to be dependent on the information you supply being correct and on a satisfactory valuation of the property
• It proves to estate agents and buyers that you are serious about buying
• You’ll know if you have any issues with your credit, before you make an offer on a property. Many people don't realise they have a credit problem until their full mortgage application is turned down

Borrow over a longer term

You could also extend your mortgage term beyond the standard 25 years. Most lenders do offer a term of up to 40 years.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Important information
The information given in this article was correct as at May 2006. It does not, however, take account of any changes in regulations, the law or interest rates since that time.

This article is not a substitute for obtaining professional advice from a qualified person or firm.

Examples given of products and services are not exclusive. Other companies may provide the same products and services, and inclusion of a product or service should not be taken to indicate that Propertyfriends.co.uk recommends it over any similar product or service.

Source: Some information sourced from www.Barclays.co.uk

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