When you start the process of getting a mortgage, an important step is the mortgage affordability check. This evaluation helps lenders understand your financial ability to handle mortgage payments, existing loans, and the risks involved in lending to you. But what does an affordability check actually involve in the context of mortgages? Let's explore the details to understand its importance and implications.
What is a Mortgage Affordability Check?
A mortgage affordability check is a process where the lender evaluates your income and expenditure to determine whether you can repay the borrowed amount. Specifically, this involves assessing your ability to make mortgage payments.
Lenders will review your income and outgoings as part of your mortgage application, and they will use a credit reference agency to examine your credit history, providing them with a clear understanding of the risk involved. Since you'll be making monthly mortgage payments over a set period, lenders need to ensure you can afford these payments without experiencing financial hardship. This entire assessment contributes to the lender's overall credit score. - check out some Practical Tips To Help Improve Your Credit Score.
Any responsible lender will carry out an affordability assessment when you apply for a mortgage. In 2014, the Financial Conduct Authority (FCA) implemented specific guidelines for mortgage affordability in the UK. These regulations require all lenders to perform checks and gather information to thoroughly analyse affordability before approving any mortgage or loan.
Creditworthiness And Mortgage Affordability: What’s The Difference?
When figuring out how a mortgage affordability check works, it’s easy to confuse this with the process that lenders use to identify creditworthiness. While both insights are essential to lenders in deciding whether to approve you, each goes about this differently. Here are the key differences between the two:
What Is The Definition Of Creditworthiness?
Creditworthiness refers to your ability to take out a loan or mortgage based on your credit rating and data held with credit reference agencies, for example ClearScore. A lender will carry out a full credit check before approving you, including looking at any other debts or potential issues on your credit file, generally looking back over a six year period. This information can help a lender decide how risky it may be to approve you for a mortgage.
What Is The Definition Of A Mortgage Affordability Check?
A mortgage affordability check looks at what you can realistically afford for a mortgage to decide whether or not to accept you. While creditworthiness deals with the risk to the lender, affordability is just as much about protecting you from accessing loans or finance that may cause you financial hardship. Affordability looks at what you can afford based on your income, financial dependents and general outgoings.
What Are The Key Differences Between Creditworthiness and Mortgage Affordability Checks?
Creditworthiness and mortgage affordability checks determine your suitability for mortgage approval. Lenders evaluate your creditworthiness by reviewing your loan and credit history, ensuring there are no missed payments or defaults.
How does this affect your mortgage application? A poor credit rating might prevent approval based on the lender’s criteria. All lenders consider your credit history and score when offering mortgages, and a higher score improves your chances. While most lenders use their credit scoring process, some may not.
A mortgage affordability check examines your current income, expenses, and other factors to ensure you can afford a mortgage. The Financial Conduct Authority (FCA) requires a thorough review of your finances before a lender can offer you a mortgage.
What Are Mortgage Affordability Checks Used For?
Mortgage affordability checks are essential for anyone considering a mortgage. Since 2014, lenders are required to evaluate if applicants can repay their mortgage without risking their financial stability. This process ensures you can handle your mortgage payments.
During a mortgage affordability check, lenders use detailed financial information to decide on your approval. While many lenders already had strong assessments, new rules were implemented by the FCA in 2014 which made these evaluations stricter.
These assessments and creditworthiness checks usually happen early in your mortgage application. Some lenders offer calculators or tools to check your mortgage affordability instantly, reducing the risk of rejection.
Understanding and preparing for these assessments can greatly improve your chances of securing a mortgage, making the path to homeownership smoother.
Why Do Lenders Use Mortgage Affordability Checks?
The FCA requires a thorough process to check your affordability as an applicant. Every mortgage provider has the responsibility to gather detailed information about your financial circumstances to complete all necessary checks.
Mortgage lenders also use affordability checks to lower risk. Alongside your credit report, an affordability check provides information on whether or not you can easily afford a mortgage.
How To Prepare For Your Mortgage Affordability Check
If you plan to apply for a mortgage, ensuring you have all the information and paperwork needed for an affordability assessment is an excellent first step. The exact documentation you’ll need will depend on your current employment. Here are some examples of what you should prepare before applying for a mortgage:
Document List If You Are Employed
If you are employed, the process for your affordability check is relatively straightforward. You will generally need to supply the following documents:
3x Payslips & P60 for the most recent year
Bank Statements
Identification, such as a driving licence or passport
Proof of your address, typically through utility bills
A mortgage lender will use this information to identify how much income you bring in each month and how much your outgoings are. A mortgage advisor can support you in ensuring you have all the correct information ready to go to ensure you don’t miss any details that can lead to rejection.
Document List If You Are Self-employed
If you are self-employed or operate your own limited company, in addition to providing your bank statements and identification, you will also need to supply the following:
Tax Calculations and Tax Year Overviews for the past two/three years
Last two/three years Company Accounts
While having at least two years of self-employment is generally preferred, especially to access most lenders, some may consider offering support if you've been in business for just 12 months.
As mortgage affordability checks for self-employed people require additional knowledge and expertise, speaking to a mortgage broker is often an excellent place to start. Working with an accountant to gather all necessary documentation can also help to support your assessment.
What About My Variable Income?
If you earn extra income through bonuses, overtime, or commissions, you may be able to include this in your income for affordability checks. While not all lenders will consider this additional income, most will if it can be verified. Demonstrating that you have received this variable income over the past three months can strengthen your case.
If you have a more complex income situation, working with a broker can help you make the right decisions and provide the right information for assessment.
Mortgage Affordability Check, What is the Process?
While online mortgage affordability calculators are widely accessible, ensuring accuracy in this crucial initial stage of the home-buying process, which connects to your Agreement in Principle, is imperative. To avoid potential issues later, you should consider the following approach:
Provide comprehensive documentation and details of your income and expenditure.
Your lender or broker will use this information to determine your mortgage limit.
Proceed to secure a mortgage Agreement in Principle.
Your chosen lender will conduct an internal credit check and, if you pass, issue a mortgage decision certificate.
What Happens If I Fail A Credit Check?
Failing a credit check doesn’t mean you won’t qualify for a mortgage in the future, but it may indicate you need to change your financial situation before you apply again. Using a broker will help you quickly establish if there are alternative lender options.
If you haven’t passed a credit assessment, some of the measures you could use to improve your chances next time include:
Paying off any existing debt
Cancelling any credit cards which are no longer in use
Ensuring your bills are paid on time
Registering to vote
Improving your credit score on your credit report
Getting into the habit of budgeting
In conclusion, understanding mortgage affordability and credit checks is crucial for you as a prospective homebuyer. Affordability checks ensure you can manage your mortgage payments based on your financial situation, including income, expenses, and debts. Credit checks provide lenders with a clear view of your creditworthiness and repayment history. By preparing for these assessments, you can improve your chances of securing a suitable mortgage, leading to a smoother and more confident home buying experience.
For further information and a wealth of additional resources, we invite you to visit our Learning Centre. Here, you will find many more helpful articles, including:
By exploring these articles, you will be well-equipped with the knowledge needed to navigate the home-buying process confidently and effectively.
If you are keen to chat further then feel free to Get in Touch today to learn more about how we could help you.
Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Published by Beechwood Mortgages Ref: 219335 with review and approval from Stonebridge Mortgage Solutions Limited who is authorised and regulated by the Financial Conduct Authority Ref: 454811.
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