What do mortgage underwriters check?
When you apply for a mortgage, the underwriter will follow the individual lender’s criteria, which varies from one company to the next. Generally speaking, an underwriter will check:
1. Affordability
This is your income versus your outgoings, including any fixed payments (e.g. rent) and non-fixed payments (e.g. food shopping and petrol).
The mortgage underwriter wants to make sure you can manage the monthly mortgage repayments on top of your bills and debts, so you don’t fall into financial difficulty.
2. Credit score and credit history
Mortgage providers check your credit score and credit history to see whether you’re a responsible borrower. If you’ve always made your loan repayments (and other bill payments) on time and in full each month, the mortgage provider will see that you are reliable.
However, missed or late payments leave a mark on your credit history and can damage your credit score. This may be a warning sign for a mortgage provider, who may be concerned that it’d be too risky to lend to you.
3. Debt-to-income ratio
Your debt-to-income ratio is the difference between what you owe towards debt each month, compared to your monthly income. It gives lenders an idea of whether you can afford to take on a mortgage, based on how much debt you have.
Normally, the lower your debt-to-income ratio, the more favourable you’ll appear to lenders, as it shows you aren’t overly reliant on credit and you are likely to have more spare cash.
If your monthly loan repayments take up a large portion of your income, or you’re struggling to meet your repayment plan, the lender may worry that you’re not able to pay for a mortgage as well.
4. Annual income
Underwriters cap the size of mortgage they can offer you at around four and a half times your annual income. This is to stop people taking out mortgages that are a lot more than they can afford. This doesn’t mean that you’ll be offered a mortgage that’s four and a half times your salary – it’s just the maximum amount that can be offered.
If you have a loan to pay off, you may find that number decreases because it reduces the amount of available income that can pay towards a mortgage.
5. Future changes in affordability
Mortgage providers must consider future changes in your affordability because mortgage repayment plans tend to span a few decades. In that time you could lose your job or take on a new expense, like the cost of raising children.
If you have a history of taking out loans and not paying them back, underwriters are likely to assume that you’ll carry on doing so. This means they may offer you less money or not be willing to give you a mortgage at all – as you pose a high risk. But if you have a good payment history, lenders may be more willing to provide you with a mortgage.
Can you get a mortgage with payday loans?
Each lender uses their own guidelines. But be aware that some mortgage providers will reject mortgage applications from people who have taken out payday loans - even if the balance has been paid in full.
This is because a payday loan can be an indication of money troubles. So, lenders may consider it to be too risky to lend to someone who has taken one out.
What should I do if I have an outstanding loan?
If you already have a personal loan and are thinking of applying for a mortgage, you can:
- speak to a mortgage broker or adviser – they are experts in the market and they may be able to find you an affordable mortgage deal to suit you
- delay your mortgage application until your loan is paid off if you’re near the end of your loan term
- consider paying the loan off early (if you’re able to)
If you decide to repay your loan early, just be aware that there may be early repayment charges from your loan provider – you’ll find details of these in your credit agreement.
Tips to increase your mortgage eligibility
If you’re struggling to get a mortgage, follow our five tips to help increase your mortgage eligibility:
1. Reduce your loan balance
If you can afford to, reduce your loan balance by making partial or full early repayments, freeing up some of your income for a mortgage. Remember to check potential early repayment charges on your loan, otherwise, it could be expensive.
2. Lower your debt-to-income ratio
Paying off some of your debt will lower your debt-to-income ratio and free up some of your income, meaning that the mortgage provider is more likely to offer you a bigger mortgage. This will also improve your credit score.
3. Fix any mistakes on your credit report
Any mistakes on your credit report could show as red flags to lenders, who may suspect fraudulent activity. Make sure everything is up to date on your credit report before you apply.
If you spot any errors, ask the relevant credit reference agency to fix them to boost your chances of getting approved for a mortgage.
4. Pay bills on time, every time
Paying your bills on time, every time shows mortgage providers that you’re sensible with managing your finances and can be trusted to meet your mortgage repayment plan. It will also boost your credit score over time.
5. Cut back on non-essential outgoings
Cutting back on non-essential outgoings can increase your chances of getting approved for a mortgage, even if you have a loan to repay. This is because it will improve your affordability. Look at your expenses and see if you can make savings on things like:
- eating out and takeaways
- shopping
- entertainment
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Mortgages are secured against your property. This means your home may be at risk if you fall behind with your mortgage repayments.
Disclaimer: All information and links are correct at the time of publishing.
Adele Kitchen
Personal Finance Writer
Adele is a personal finance writer with more than 10 years in the finance industry behind her. She writes clear and engaging guides on all things loans for Ocean, as well as contributing blogs to help people understand their options when it comes to money.
