One of the common questions that many homebuyers ask when getting started with the process is the amount they can borrow for a mortgage. They seek to know how much mortgage they can afford. The answer to the question directly impacts the price range for homes that they can consider. It’s important to note the first step begins with settling on a house that you can afford.
Things to know as you borrow for a mortgage
As much as the answer isn’t set on stone, as your financial status might change, it’s important to note that the mortgage amount is considered based on your current status. Factors such as a fall in housing prices, a change in interest rates, a pay rise or promotion; all that can affect the amount of mortgage you can borrow. However, the decision is generally based on your present income status and circumstances.
Factors that influence the amount of mortgage to borrow
There are a number of factors that influence the amount of mortgage that you can borrow. Some of the factors include;
- The amount of deposit that you have so far saved.
- Your total earnings
- Your expenditure
- Some of the future changes that might affect your earning potentials such as switching jobs, having a baby, or redundancy.
Before you apply for a mortgage, there are some guidelines in place that you can follow so as to figure out the amount of mortgage that you can qualify for and even afford. That’s where the use of a mortgage calculator comes in.
Why use a mortgage calculator?
Once you input your monthly income and obligations; the mortgage calculator then calculates the maximum monthly mortgage payment that you’re likely to make. It will also work out the total mortgage amount that you can afford based on your financial details. The mortgage calculator will also make it possible to ascertain how the varied interest rates and your level of personal income can have an impact on the mortgage amount that you can afford.
Try different mortgage calculators online
There are a number of mortgage calculators that are available online and you can make use of any to get insight on the amount of mortgage you can potentially borrow. With the help of mortgage calculators, you can also work out the amount of deposit that you might need to save if you’re to qualify for the mortgage. If in case you have identified a property that you are interested in then the calculations you do will give you insight on how much mortgage you can borrow.
How Mortgage Lenders Decide on the Amount to Loan People
In the past, the majority of the lenders made a decision on the amount of mortgage to loan based on your income. The system was referred to as a loan-to-income ratio. It meant that the loan you could afford was directly in relation to your income amount. If in case you earned £45,000, it meant that you could borrow 3 – 5 times the amount. So it meant that the mortgage amount that you would borrow would be £225,000.
Mortgage Lending Cap
At present, the lenders cap the amount of mortgage that can be borrowed to four and a half times the amount of income. This is due to the fact that the rate of payment of many workers in the UK keeps changing. Borrows are expected to raise larger amounts of deposits so as to show proof that they can afford good value mortgage.
Positive Credit History When you Borrow for a Mortgage
When reviewing your mortgage application, lenders normally look for the overall positive credit history, low amount of debt, and a steady source of income alongside other factors. Lenders take time to scrutinize the borrower’s credit report when doing a review for a mortgage loan. In the process, they also review other factors such as;
They take a look at any of the recent applications you might have made for any other forms of debit or credit. Such applications are what contribute to hard inquiries on your report.
Lenders also take time to review the borrower’s credit history. They go through their loans, credit cards, lines of credit, and every other thing that comes up on the credit report. This is done with the aim of ensuring that you have a track record of making timely payments which indicates that you will be responsible for your payments as a mortgage borrower. If in case you have some late or missed payments, the lender may require an explanation on the same.
Credit utilization When you Borrow for a Mortgage
Your credit utilization ratio is another key factor that lenders consider when deciding on the amount of mortgage to loan out. The ratio shows the percentage of your available credit that you’re utilizing at any given time. If in case you’re using too much credit then it might make you appear as overleveraged and that’s considered to be risky for the lenders. The majority of the lenders prefer that the credit card utilization should be under 30% so such should be taken into consideration if a positive impact is to be realized on the credit scores.
What lenders look at when deciding on the amount to loan people
When making a decision on the amount of mortgage to loan; a lender is likely to look at the following;
- Your salary and any additional income.
- Any expenses such as credit card debts, child maintenance, and other bills.
- Non-essential payments such as money spent on meals, clothing, and entertainment among others.
What Mortgage Providers Require as Proof When you Borrow for a Mortgage
You will be required to provide the lender with bank statements and payslips as proof of your income and expenses. If in case your expenses show doesn’t in any way match with your bank statements then such can delay accessibility to a mortgage. If in case you are self-employed, you should provide the following details;
- Recent bank statements
- Details of your business accounts
- Details of income tax payments
How to find a mortgage where you can borrow a maximum amount
The first step towards finding a great deal begins with deciding on the type of mortgage that you want. You can decide if you want an interest-only mortgage, variable rate mortgage, or fixed-rate mortgage. You should also find out the amount of money to save as a deposit. Factor in the amount you might need as associated fees including solicitor’s fees, stamp duty, and survey costs.
Ensure that you engage a mortgage company that’s tailored to address your needs.