Your Borrowing Capacity


The following things determine your borrowing capacity:
  • Income
  • Liabilities
  • Amount of Deposit
  • Credit History
  • Employment Status
Income
The main thing is that the borrower’s income is sufficient to support the repayments of the mortgage and associated costs. Your borrowing level is generally worked out as a multiple of your income, with a wide range of definitions of what makes up a qualifying income. Proof of income will be required, in the form of wage slips or employers letters, if the borrower is self-employed proof will be accounts for two or three years, or an accountancies letter, or even correspondence with the Inland Revenue.

Liabilities
Although a high gross income may look attractive, the lender is looking for unallocated ‘free’ income. Also, stable credit repayments. The whole point, generally, is to asses’ financial stability; therefore the lender will need details of:
  • Outstanding balances on overdrafts, credit cards, etc.
  • Unpaid bills.
  • Loans - amounts outstanding, term, purpose, payments.
  • Hire purchase agreements.
  • Maintenance payments.
  • Any other regular commitments on income.
Amount of Deposit
In almost all cases, it is not possible to get a mortgage to cover the entire cost of the purchase; therefore a deposit will be required, usually between 5% and 10%. The higher the deposit made, the higher the equity interest in the property, therefore the less change of going into “negative-equity”.

'Equity' refers to the value which would be left on sale when the mortgage had been repaid and all costs covered.

'Negative equity' refers to the amount of mortgage which would remain to be paid off after the sale of the house

Credit History
As with all loans, the lender will do a credit check to assess the eligibility of the borrower. They will check:
  • Existing lenders.
  • Credit check, which will show County Court Judgements (CCJs) and any 'letters of satisfaction'.
  • Bank references
  • A Bankruptcy Check
Employment Status
Each lenders criteria is different, it also depends on the current economical climate. Although someone who has had a stable job it likely to be treated more favourably than someone who has “job-hopped”.

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