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Wednesday, 3 October 2012

How lenders decide how much you can borrow

When you take out a mortgage, lenders look at a number of things to work out how much you can borrow. These include your earnings and outgoings, the property value and your credit history. Whatever you borrow, you need to be sure you can afford the repayments.

Your earnings

Lenders have in the past offered to lend an amount based on earnings. Recently it has become more common for lenders to make an affordability assessment when calculating how much they will lend you.

What can you afford?

It's important to give your lender as much detail as you can about your earnings and outgoings so that you're offered a mortgage you can afford. You also need to remember to budget for the one-off costs of buying a property such as administration and solicitor fees and Stamp Duty.

The Money Advice Service website has a range of easy-to-use calculators to help you work out what you can afford and the likely monthly cost of a mortgage.

Your property

The property value

Your lender will arrange a valuation to check how much the property's worth.

Special types of property

Some lenders limit the amount they'll lend on certain types of property, for example timber-framed. It's worth shopping around to compare deals.

Your credit history

Your lender will check your credit history and ask previous lenders or landlords for references. If your record shows you've had difficulty with loans or rent payments in the past, it may affect how much you can borrow.

Don't be put off if a lender refuses you a mortgage or offers you an expensive deal - it's still worth shopping around.

Self-certification mortgages

If you can't prove your income (perhaps because you're self-employed and don't have accounts going back far enough), you may be able to get a 'self-certification' mortgage. Although you may not have to offer proof of income to the lender, the lender will still want to be sure that you can afford the repayments so may ask you to provide evidence of your other outgoings.

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