Deciding to buy a home is a major decision that can affect you for a long time. Even if you do not have enough cash to pay the full price, there are various methods to help you fund a home. However, applying for a mortgage does not just involve assessing your capacity to pay monthly fees. Your income and outgoings have to be assessed, and certain circumstances will have to be considered.
How lenders assess what buyers can afford
When you apply for a home mortgage, the loan provider will limit the ratio of the loan to your income at four and a half times your earnings. The amount of monthly payment will be assessed considering your living expense and income. There is also what they call a stress test, which is the ability to repay the mortgage considering future events such as an increase in interest rates, unemployment, life changes, etc. The lender may limit the amount you can borrow if you will not be able to afford payment considering the mentioned circumstances.
What lenders take into account when you borrow?
- This may include income from work, business, pension, investment, financial support or other earnings. To prove this, be ready to provide pay slips or bank statements and details of income tax.
- Aside from day-to-day expenses, these include your utility bills, loans, credit card payments, maintenance and renovation payments and insurance. Be ready to estimate your living expenses, which may include childcare, recreation and clothes.
- Future events. These changes may affect your expenses. In general, the lender will see if you can afford the mortgage considering an increase in interest rates, in case of job loss or loss of income (bankruptcy), illness, life changes (marriage, childbirth, etc.). In that case, think ahead and plan how you are going to settle the mortgage payments.
How much can you borrow?
You can seek advice directly from a lender or use an online mortgage calculator. This should give you an idea how much lenders may offer you as well as how much your monthly payments will be. If you have a low income, do not be discouraged. There are government schemes to help you climb the property ladder. It is also a good idea to check your credit record before a mortgage application.
The cost of buying a home
House costs include major upfront costs, ongoing costs, leaseholder costs and moving expenses apart from mortgage costs. The major upfront costs include deposit, stamp duty, valuation fee, surveyor’s fee, legal fees, removal costs, agent’s fee and electronic transfer fee. Ongoing costs include maintenance and repair, insurance, council tax and running costs.
Affording a home is not just about having the means to pay the deposit and other upfront costs. Financial and lifestyle considerations are important factors in the process of calculating. It is also worth pondering what mistakes to avoid. In case you have decided to buy, for example, a property for sale in Colchester or other town near London, it pays to work with the best professionals in the area to help you make the transaction smoothly.
