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What do lenders look for with my earnings?

Whether you are employed or self-employed, mortgage lenders are going to go through your bank statements with a fine tooth-comb. Here are some of the main things they will be looking out for in your earnings, and some tips on how to get ready in advance.

Your income, expenses, money managing skills and future predictability will all be assessed by the lenders. While they all have their own methods and formulas (meaning some may lend more/less than others) each and every lender will be scouring your bank statements and payslips for the following…

Income

The first and most obvious thing that the lenders will look at is your income. Does the money in your account match your pay slips? Is all your income accounted for? The smoother you can make the process for the lender, the better. That includes making sure everything adds up and is presented clearly. For example, if your bank statements show that you’re paid monthly by a company name that doesn’t match the one on your payslips, you’ll need to make that clear to avoid any confusion or extra hassle for the lending assessment team.

There have been cases of mortgage applications being rejected by lenders because the name on the applicant’s payslip does not exactly math their ID documents – there really is no margin for error. It can be a good idea to resolve any inconsistencies before applying.

Expenses

Are you spending all of your income every month? Mortgage lenders will also scrutinise your bank statements to build a picture of the cost of your lifestyle in relation to your income. If you’re spending all your money with none left over, that indicates to a lender that you couldn’t afford a mortgage on top of everything else. Lenders will however take into account those costs that are likely to change once you own your own home e.g. rental payments or deposit savings.

The main question that lenders will be asking here is, is your income enough to afford your mortgage when all your expenses, regular or one-off, are considered? Be aware that overdrafts and odd credits will most certainly be looked at, however if you’re sneaking into your overdraft (arranged or not) at specific times of year such as Christmas, when you need a little extra to cover all the costs, then that’s not too much of a problem. If, though, you’re going into overdraft every month just to cover the usual bills, then lenders will clearly be able to see that your income isn’t enough to fund your lifestyle at the moment, and in their eyes you certainly won’t be able to afford a mortgage.

work out expense affordability

Want to know how much you can borrow? Try this blog post…

There are the usual expenses, the weekly shop, utility bills, council tax… all of these will be assessed by the lenders when calculating what you can afford. Living modestly will demonstrate that you can comfortably afford a mortgage and you have no problem with cutting costs if times became hard.

You should also know that different lenders will approach childcare costs differently. There are some lenders that will assume you’re paying a certain amount, some that will dismiss the costs from your affordability completely, and others that will want costs detailed for each individual child. Lenders will be checking all the details thoroughly.

Extreme expenses, such as high spending on frivolous items, gambling and other lifestyle choices that are a real drain on your income will be frowned upon, unless you have a good reason to explain them. Above all, lenders are looking to find proof that you can be relied on to repay your mortgage. The more reliable and modest your spending habits, the more the lenders will trust you.

Managing Money

A mortgage is one of, if not THE biggest commitment of your lifetime. It’s a huge mountain of debt to take on and pay off. Lenders will want to know that you can manage your money responsibly.

Do you have experience with debts? Having a credit card can be beneficial to your credit rating, but if you can’t manage to pay the balance on time, lenders will be reluctant to lend a larger amount to fund your home.

Lenders will also check your earnings and credit history to make sure that even when you’ve encountered debts or shortfalls, you’ve handled them well.

Future Uncertainties…

This is applicable to every mortgage applicant, but it’s especially important for the self-employed. Lenders will be looking for stability in your earnings, and fairly regular income(s). They want to be reassured that you can sustain mortgage repayments which will tell them that you could sustain a mortgage.

This is why many lenders require you to have 2 years proof of trading at least when you’re self-employed. They want to know that you have experience in your trade and that you have a good chance of keeping business level in the future. If you work on contract you’ll need to show the lenders that you can source and find work for when your current contract ends. If you can’t find work, how could you afford the mortgage?

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