How mortgage lenders work out your mortgage affordability?

Your mortgage affordability

When looking to determine your mortgage affordability, mortgage lenders can now do a complete deep dive into your finances and highlight key points of interest such as how many times you dine out, the type of restaurants you dine at, if you are a gambler, if you take holidays often etc.

These factors will all affect your mortgage affordability.

It is not clear what underwriting procedures all mortgage lenders use as they are all different but as a rule of thumb if you wouldn’t lend money to someone with a particular factor then a mortgage lender probably won’t.

Since the mortgage market review occured a few years ago, mortgage lenders have increased their mortgage affordability checks to ensure they meet regulatory standards set out by the FCA

Mortgage lenders still use a 4.5 income multiple (or something similar but the income multiples mortgage lenders use range from 3 to 5.5) to determine how much mortgage they can give you.

Example: If you earn £60,000 you may qualify for a £270,000 mortgage but they will always carry out a more indepth deep dive into your finances to determine your true mortgage affordability.

If your proposed mortgage repayments on top of your basic living costs will take up an excessive amount of your monthly income then a mortgage lender would be reluctant to lend that amount to you as your mortgage affordability will be deemed low.

What factors mortgage lendrs consider for yourmortgage affordability

When deciding if to lend to you mortgage Lenders may look into:

• How much you earn
• If you have any existing debts
• What your committed expenditures are and how likely they are to rise
• If you have any dependants e.g Children or plan to
• If your employment is stable
• Your age- some lenders will not give you a mortgage if you are approaching retirement or the mortgage term will end after you are 75
• The mortgage term- which intertwines with the above
• If you are applying alone or with a co-buyer(Co-buyers can greatly boost your affordability, hence why we are such big fans of a co-buyer network “Homebae”)

Do mortgage lenders check your credit file?

To determine your mortgage affordability most mortgage lenders will check your credit fle and mortgage lenders have their own different credit scoring models which all differ.

Some things to look out for on your credit files before applying for a mortgage.

• Have you missed a payment in the last 3 months before applying?
• Have you got too many open accounts on your credit file?
• Have you got too many addresses on your credit file?
• Have you made too many credit applications recently?

The things above can hugely affect your mortgage affordability ad limit your chances of getting a mortgage.

How mortgage lenders view your Overdraft?

Lenders may still lend to you if you have been in your overdraft, just as long as it is not consistent(hence you are not dipping in to your overdraft ever so often). If you seem reliant on your overdraft then this may very well affect your mortgage affordability as the mortgage lender views you as being financially unstable.

Mortgage lenders will each have their own different criteria for how they treat overdrafts but generally they wil like to see a constant positive behaviour.

For example during christmas it is understandable that you might have to dip into your arranged overdraft, but if you are living in your overdraft month on month they may be very hesitant to approve your mortgage as it shows you are living beyond your means.

As mortgage lenders can ask to see up to 6 months of your bank statements it is generally good practice to get your spending habits in good shape before this timeline and not within it.

Getting yourself mortgage ready months in advance will mean that when it comes near the time for you to get a mortgage your mortgage affordability will likely be at a better state than if you hadnt.

How to Improve your mortgage affordability

To improve your mortgage affordability, you should focus on these categories:

• your mortgage affordability
• your spending habits
• your credit score
• Your current credit commitments

Your mortgage affordability

Your affordability essentially boils down to the lender seeing a consistent yearly income that is enough to keep up with your monthly payments and living expenses that fit sufficiently within that income with room to cover your monthly mortgage repayments. If you cant meet this basic mortgage affordability requirement then it is very unlikely you wont be able to get a mortgage.

You can use our Property ladder plan to get a quick health check and see what your mortgage affordability looks like prior to applying for a mortgage. Huuti will show you exactly what the mortgage lenders may be looking at and what changes to consider making to increase your mortgage affordability.

For example, If your monthly mortgage repayment makes up more than 35% of your combined monthly income then many mortgage lenders may not be willing to lend to you as your mortgage affordability is low.

Your spending and repayment habits

When it comes to your mortgage affordability there are two spendng habits that can severely ruin your chances.

1.Not paying your bills on time and

2.Not having a history of ‘normal’ spending habits. e.g random betting.

What you need to do to improve your mortgage affordability:

If you haven’t been doing so already then start paying your bills on time! If you do not have a track record of doing this running up to your application, it may severely harm your chances.

Review your bank statements for any transactions that would raise concerns or require an explanation. For example, blowing cash on online gambling and betting may make lenders think you are a risk to lend money to. If this is the case then see if you can do without these for at least 6 months so you can boost your mortgage affordability before your mortgage application.

Your Credit score

Every Mortgage lender will check your credit score to determine your mortgage affordability and whilst you don’t know exactly what they are looking for, it is important your credit file looks good.

You can get your free credit score with Huuti and see exactly what is holding your mortgage affordability back and what to do. E.g registering on the electoral roll, reporting your rent payments etc.

Some ramifications can take up to 6 months to fix so it is best to correct them instantly.

Another important tip is to avoid making any new credit applications 6 months before your mortgage application as this can negatively affect your credit score.

Firstly each time you apply for a loan, a footprint is left on your credit score lowering it for a period of time.

Secondly, another loan will show that you are increasing your monthly liabilities and mortgage lenders may not take kindly to this.

Your credit commitments

Mortgage lenders may look to see how many exisiting credit commtments you have.

If you have too many then they may be unwilling to lend to you as this may mean you could potentially struggle to keep up on your mortage repayments.

Your mortgage affordability can be managed with careful planning.

How to improve your credit score

You can improve your credit score by doing the below things but you should be aware that improving your credit score will take at least a few months.

Open a bank account or credit account

The simplest thing you can do to establish or improve your credit score is to open a bank account or any other credit account. 

By opening a bank account you open an account which gets reported to the credit bureaus as an account on your credit report.

The longer you have this account open for the longer you will have a credit history. It usually takes 3 years from you opening an account which gets reported on your credit file before you will have any credit history which can be seen by others.

Opening a bank account also allows you to have an account on your credit file with a verified home address. This means it will be easier for you to access credit products in the future.

A bank account might also be the easiest way to a credit card as banks are more willing to offer credit cards to account holders as they can view your account history and see how credit worthy you are even if you have a low credit score.

Ask your bank for a small overdraft facility

To Build credit you need credit so one of the ways to improve your credit score or build credit is by having an overdraft. You then need to show good behaviour when you have access to this credit.

By asking your bank to give you an overdraft facility you will have a credit account open on your credit file which boosts your credit score. 

You will also have the ability to use your available credit, sticking to the 30% maximum credit utilization golden rule per credit account and thereby showing good credit behaviour which should boost your credit score even further. Always repay your overdraft as soon as you can to avoid any fees.

Get a Household Utility in your name

Some utility accounts are now being reported on your credit file and having one in your name is a very good way to improve your credit score. This means that your payment history on your gas, electric and telephone service will affect your credit score.

By getting yourself named as the account holder on these services you can establish and improve your credit score if your bills are paid on time and there are no balances or defaults on the Utility account. 

If you live in a shared accommodation be sure to avoid any disputes and get payment for utilities well in advance so as to avoid any of your house mates holding you hostage and ruining your credit file.

Do you live with your parents? Ask them to put your name, date of birth and address on the utility bill. This will open a new account on your credit file and ensure you begin to get credited for the regular payments being made on the account.

If payments are missed on the account this could negatively affect your credit score so you must ensure payments are not missed. 

You can also simply get a cheap phone on contract. A £5/month contract will be achievable with little or no credit history as the risk of default is very low and making regular repayments to your phone contract will boost your credit file.

You should avoid applying for more expensive phones with no credit file or score as this could damage your credit score even further even though you don’t have one.

Not all utility providers report your payment history to the credit bureaus so you may want to inquire with the utility provider before opening an account.

Keep your credit utilization below 30%

Your credit utilization is one of the factors that affects your credit score. The golden rule is to use no more than 30% of your available credit. If you are currently using above this then reducing your credit utilization below this limit will help improve your credit score

Pay down your credit card balance & other debts

Credit card balances and credit debts are recorded on your credit file. These balances have a negative impact on your score(especially when your revolving debt is over 30% of your available revolving credit) as well as costing you in interest rate charges and fees. 

Paying down your credit card balances, loan balances or any default you have on utility and credit accounts will help improve your credit score.

Paying your credit card balance in full each month

Making only the minimum payment on your credit card means you have an outstanding balance which is recorded on your credit file.This negatively influences your credit file. Paying your credit balance on time full in each month will help improve your credit score

Make your credit repayments on time

Missing credit repayments negatively impacts your credit score. Keeping up with your monthly credit repayments will see your credit score improve gradually.

Making your credit repayments on time will also ensure you avoid negative credit markers such as:

• Defaults
• County court judgments
• Missed repayments
• bankruptcy

Get on the electoral roll

The easiest way to improve your credit score is to register to vote as this data is recorded on the public register which the credit bureaus check and include in your credit file. This is the first way to prove your identity and by far the easiest.

In the future when you apply for credit or a credit check is done, this will be the basis of their verification method for you and helps make you seem more creditworthy. You should check with your local council here if you are already on the electoral roll and if not you can register to vote here.

If you are not eligible to vote in the UK you will not be able to get on the electoral roll. In this case you can get a similar benefit by submitting a document to either Experian, Equifax or callcredit proving your identity and address. You can then ask them in writing to confirm that they have verified your identity on your credit file

Get a credit builder card

To improve your credit score you could get a credit builder card. Credit Builder cards are similar to secured credit cards as they are targeted towards people with low or no credit scores.

Credit Builder cards do not require security deposits but as with secured credit cards they will have low credit limits and high APRs. 

A student credit card will likely be available on the same terms as a credit builder card. The best place to get this might be from your bank as they will be more likely to approve you for this type of card due to already having an idea of your income and expenses.

Store credit cards are usually easy to get approved for too.There are also credit builder prepaid cards which charge a monthly fee which is then recorded on your credit file as repaying a debt. This helps you build your credit score.

Get a secured credit card

Secured credit cards can be used to improve your credit score as they allow you to show you can make credit repayments, they add to your available credit which will improve your score and they allow you to show a low credit utilization which will improve your credit score.

Getting approved for most credit cards will be difficult if you have a low credit score but a secured credit card can help you overcome this. 

Secured credit cards will approve you if you pay a deposit as part of your secured credit card application.

This deposit is usually your credit limit or a percentage of your credit limit. Secured credit cards aren’t very common in the Uk. 

Capital one was known to offer one and you should contact them to see if this is still available. 

You should be aware that secured credit cards will have low credit limits and high APRs. This can lead you to fall into serious debt if you fail to keep up your monthly credit repayments.

Get a credit builder loan

Another way to improve your credit score is by using a credit builder loan.

Credit Builder loans, just as they sound, help you build credit. The idea is you take out a loan but rather than receiving the loan funds these are deposited in an account(usually to earn interest) and you make repayments to the loan provider every month. 

As you make these loan repayments on time your credit file records this and your credit score improves. At the end of the loan term you get all your loan repayments and whatever interest you have gained.

Loqbox is a credit builder loan provider in the UK.

Get a cosigner for a credit card or loan or become an authorised user

If you can’t get a credit builder loan, credit builder card or secured credit card then your next bet to help you improve your credit score will be to get yourself a cosigner on a credit card or loan.

You should really only do this if you are likely to repay your credit cards or loans on time and in full every month.

If you fail to make your credit card repayments on time then this may affect your co signer’s credit score too. If you make these repayments on time your credit score will rise and the payments will be registered on your credit file for at least 6 years.

Getting a cosigner on a credit card or loan creates a financial relationship between yourselves. This means any negative behaviour from them might affect your credit score negatively and vice versa. 

A cosigner essentially allows you to qualify for credit and in some cases cheaper credit. A cosigner will also be legally responsible for any debt owed on the account if you default.

Another way to help improve your credit score is by becoming an authorised user on someone else’s credit card.

The difference between authorised users and cosigners isn’t that much. Becoming an authorised user on someone else’s credit card will help you improve your credit score if the main card holder makes all their repayments in full and on time each month as well as keeping their credit balance low.

some credit card companies might not take you into account and may not collect this data and hence report it on your credit report.

You should contact the credit card company asking them to report the fact that you are an authorised user on the credit card to the credit bureaus. 

Becoming an authorised user does not give you any liability, so if the main card holder defaults you won’t be held liable but it does affect your credit score if the account is mismanaged or goes into default.

Keep your credit accounts open as long as possible

Closing credit accounts can negatively impact your credit score as this reduces the number of accounts with a credit history. This is especially worse if the credit account you close is one with a long history. The account will no longer be open and will therefore not count towards the majority of your credit score. 

Unused credit accounts which don’t have long histories can be closed as they do not add to your credit score. Having access to too much unused credit may also be seen as negative.

Avoid payday loans

Most lenders look down on payday loans as they view people who take out these loans to be desperate and hence financially irresponsible.

Paydayloans will therefore have a negative influence on your credit file and you should avoid them.

Avoid making too many credit applications

Making applications for utility or credit can reduce your credit score. This is because everytime a utility or credit provider is about to open a new account they will do a hard credit search. You should only apply for credit or utility which you are pre-approved for. If you make multiple credit applications then multiple hard credit searches will be done on your credit file.

This means your credit score will go lower as the credit bureau will view too many credit applications as you being desperate. If you stop making blind credit applications then your credit score will likely improve. 

You should always use an eligibility checker to see if you will be approved for credit or utility accounts before you apply. These checks are done with soft credit searches which only you can see.

Report your rent to the credit bureau 

Another way to improve your credit score is by reporting your rental payments to the credit bureaus.

If you currently pay rent or paid rent within the last 3 years you will be able to report your rental payments to the credit bureau and this will be an account on your credit file showing your payment history. 

Paying your rent on time will ofcourse improve your credit score whilst missed payments will reduce your credit score. The scheme is known as the rental exchange scheme and is currently only being offered via Experian.

Increase your available credit limit

Increasing your credit limit will reflect on your credit file and improve your credit score as it shows lenders are willing to trust you with more money as well as reducing your current credit utilization (how much you spend in relation to how much credit you have available. The golden rule is a maximum of 30%). 

You can ask your current card provider to increase your credit limit or let you know if you will be eligible for a credit limit. Also ask if they intend to run a hard credit search on you and do not consent to this unless they will pre-approve you for a credit limit increase.

Open a new credit card account

Opening a new credit account will be your next option if your current credit card provider will not increase your credit limit. You essentially accomplish the same things as your available credit limit increases. 

You must repay your balances on your credit card account every month and avoid using over 30% of your available credit. This is a good option if you want to improve your credit score.

Have a good credit mix

Mix things up a little by having a varying degree of accounts on your credit file. Like your partner, credit bureaus like to see you mix things up a little bit. By this, we mean that a proportion of your credit score is ranked by how diverse the different types of credit you have been utilizing is.

Examples include:

Revolving accounts (i.e. credit cards, store cards)

Installment accounts (i.e. home equity line of credit, auto loans)

Open accounts (utility accounts)

Increase your variety and your credit score will increase.

Ensure your registered address is the same on all your credit accounts

Any active accounts on your credit file should display your correct address. You can check the addresses on your accounts by viewing your credit file. Make sure all active accounts list your current address. This may improve your current credit score.

Check your credit score regularly

Checking your credit score regularly is one of the ways to ensure that the information on your credit score is indeed up to date.

It also informs you on what your credit score is and this allows you to have an idea of which credit providers may lend to you.

If you find any errors on your credit score or report you can contact all of the credit bureaus or the specific credit bureau where the error is mentioned and ask them to make the necessary corrections.

The credit bureaus will check and investigate the matter but in the meantime put a notice of correction on the record entry so that any third parties who are checking your credit score will be aware that the entry may be incorrect.

The credit bureau will usually let you know the outcome of their investigations within 28 days.

If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.

Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.

Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.

Remove negative financial links

You should check your credit file for financial links that you don’t recognise. Some financial links can reduce your credit file as this might mean your credit score is going down due to someone else’s bad credit behaviour.

Any financial links which seem out of the blue can be removed from your credit file. Financial links can be generated by just sharing apartments with someone else, getting a loan with someone else etc. You should ask the credit bureaus to correct this.As you remove these negative financial links your credit score should improve.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.