You may see many lists of what not to do when planning a mortgage application however what do underwriters look at when assessing a mortgage application.
Banks look at your ability to service proposed mortgage repayment by way of income, the source and sustainability of income i.e. permanency of your role or if a contract role whether it is a second and subsequent contract or the term of the contract. If income is made up of gross basic income and variable income the lenders will take into account 100% of the gross basic income but the amount of variable income a bank will take into account will depend on whether it is regular or irregular. Income also has to be taxable so no mileage or travel allowances which are designed to reimburse you for a cost you have incurred.
Bonus income will be taken if it is proven and can be expected to be paid going forward. The lenders will look at if bonus was paid in the last 12 months with most lenders requiring evidence of bonus for two to three years. If proven lenders will take between 50-100% of the bonus amount into income calculation.
Car Allowance, if paid monthly and classified as guaranteed will be taken at 100% of taxable amount.
Shift allowance will be taken into account again if proven and depending on how it is classified by your employer on the salary certificate.
Overtime, commission and other variable income all need to be consistent and proven over at least a 12 month period.
Lenders all differ in terms of the level of income they will take into account as allowable.
Under Central Bank rules a bank is allowed to lend up to 3.5 times multiple of allowable income. If you have variable income then the amount of variable income that a lender will take into account under their underwriting rules will very much impact on the amount you can borrow.
2. Loan to value – this means the mortgage divided by the purchase price of your property
First Time Buyers can borrow up to 90% loan to value, this means they need to have a 10% deposit. Second time buyers can borrow up to 80% finance under Central Bank rules but there are some exceptions available to Central Bank rules that allow a second time buyer to go from 80% loan to value to 90% loan to value.
3. Evidence of repayment capacity
The bank will need to see that you can demonstrate that you can afford to repay the mortgage that is proposed, in most cases on a stress tested basis. In all cases lenders need to see that you have demonstrated repayment capacity for the 6 months immediately preceding application.
Repayment capacity can be demonstrated by way of rental payments, monthly savings and any financial commitments that are not ongoing such as personal loans which will be cleared prior to mortgage draw down.
Lenders like to see rent being transferred monthly via electronic transfer (as opposed to being paid in cash). Savings should be regular and consistent, some applicants like to make lump sum transfers, particularly where income can be in the form of commission or overtime payments that are paid quarterly. We can look to apply an average on the uplift on savings account balance over a period of 6 months but the ideal is that savings are mandated monthly from income and any lump sum amounts are then to further support.
If loans are recently cleared or to be cleared prior to loan offer or mortgage draw down then we will need to see a statement for the loan to show level of repayment in the last 6 months.
A key point is to ensure savings are not ceased or that there are no gaps in savings in the last 6 months. For example some clients think that once they have saved the requisite deposit then they can stop savings, this is not the same as it can be very difficult to then prove repayment capacity.
How much do we need to demonstrate? Lenders differ in terms of level that needs to be demonstrated. Some lenders look for 100% of the proposed mortgage repayment based on proposed mortgage amount, term and rate, other lenders look at 80% of the proposed stress tested repayment to be proven. Stress tested means that the lenders will take the current rate plus 2% and want to see if you are demonstrating savings that would be equivalent to required mortgage repayment if rates were to increase.