What do mortgage lenders look for?

If you want to know how to increase your chances of a successful mortgage application, read on. These are the things mortgage lenders will look for before deciding whether to say yes.

Your mortgage application form will be scrutinised, along with your bank statements and credit history. Lenders want to make sure that you're reliable and that you could afford the repayments. Each lender has its criteria for acceptance, but what exactly do they want to see?

1. Your debt

Having a lot of debt isn't necessarily a barrier to a mortgage. It's the percentage of available credit you're using that lenders want to see. This is known as your credit utilisation. It's best to try and keep it at around 25-30% to please a lender. Having a high credit utilisation is often considered a red flag to lenders - it suggests you're relying on credit too much and having problems repaying debts. For example, if you've got three credit cards with a combined credit limit of £18,000 and you're using £12,000 of it, this would be a bad sign (66%). On the other hand, only using £3,000 of it would show lenders that you’re not relying on credit (16%).

2. Your debt-to-income ratio

Again, a lot of debt doesn’t mean that your application will necessarily get denied. If you've got the income to cover your debt and allow for contingencies, then it should be fine. Lenders will only worry if your debt-to-income ratio is high. For example, if your income is £1,800 a month, but your total outgoings are £1,500, this doesn't leave much room to allow for emergencies or any other financial musts.

To calculate your debt-to-income ratio, divide your regular outgoings (loan payments, student loans, child support etc.) by your monthly wage. Include your projected mortgage payments as well. Then multiply the result by 100. Using the example above:

(1500/1800) x 100 = 83%  - this would make you a high-risk borrower

Try to keep your debt to income ratio below 40%. If it's below 20%, you'll be considered a very low-risk borrower.

3. Good payment history

Lenders will want to see that you're a reliable borrower through consistent payment history. Each time you miss a payment, it will be marked on your credit file for lenders to see. Even if you’re just late to make a payment, it can get put on your credit file as a missed payment.

To improve your chances of being offered a mortgage, you'll need to have a history of keeping up with payments.

4. Recent credit applications

Each time you apply for credit, the lender will search for your credit file. This could be either a soft or a hard search. Only you can see soft a search on your file, but a hard search can be seen by anyone who checks your file. If you have too many of these in a short space of time, this could signal to lenders that you’re credit hungry.

Hard searches stay on your credit file for a year, so it's best to avoid applying for credit in the months before applying for a mortgage. If you want to check if you’re eligible for credit, for example, a credit card, you can use an eligibility checker. These only ever do soft searches, but if you then continue the application, they’ll always do a hard search before making the final offer.

5. Proof of income

If you’re employed, lenders will want to see at least three months of payslips. Those that are self-employed will usually have to provide two years of accounts. If you’ve just changed jobs, it might be best to wait at least three months before applying for a mortgage, as lenders like to see the stability of income too.

Find out how and why you should check your score before applying for credit.