When assessing an application there are a number of areas a bank will consider as part of their assessment. The following 5 items will determine the level you will be approved for and if you will be approved. From income and savings, loans to credit checks, here’s what you need to know –
How will a bank assess my income for mortgage purposes?
1.Sustainable income
Your eligibility for a mortgage will be based very much on your income. Standard lending rules for first time buyers are that you can borrow up to 4 times allowable income and 3.5 times for second and subsequent buyers. Income needs to be from a sustainable source such as permanent employment, a long term contract or if you are self employed a bank will look at your income over the prior two years at minimum.
If you move jobs before or during a mortgage application this can be an issue as in most contracts there is a six month probation period. Most lenders credit policy require probation to be completed prior to application. Some exceptions can be made to waive the requirement for probation to be complete but this is very much on a case by case basis depending on the strength of the overall application and the qualifications and employer of the applicant.
If you move from being employed to self employed then bear in mind it will most likely be two years at minimum before you can apply. A bank will take an average of your tax returned income over the last two or three years, depending on the lender.
What deposit amount do home buyers need?
2. Deposit and transaction cost
All mortgage applicants must have a minimum 10% deposit to go towards the purchase of a home. This can come from savings, gifts, help to buy scheme if you are a first time buyer purchasing a new build home or equity if you own a home and are selling.
Gifts are very much prevalent in the Irish mortgage market with 37pc of our clients at doddl receiving a gift. However, it is important to note that some lenders require that you can show that you have saved the equivalent of at least 5% of the purchase price yourself. The reason savings are important is they show a level of discipline that you can put money away outside of standard rent payments.
A bank will also need to see that you have funds to cover legal fees and stamp duty to complete out on the purchase. As such its not just a 10% deposit, stamp duty is 1% of the purchase price up to €1m home value and 2% for the excess above €1m. We would always advice our clients to budget 12pc of the purchase price for deposit and transactions costs including stamp duty and legal fees.
When making a mortgage application a bank will need to understand the source of your deposit and transaction costs and you do not have a clear source of funds set out they will not progress to approval.
Will a bank look at my bank statements as part of a mortgage application?
3. Clear evidence of repayment ability
Demonstrating evidence of repayment capacity is the main reason why applications can be deferred or declined. All lenders, except one, require that you show clear evidence of repayment capacity during the six months immediately preceding application.
As part of the mortgage application you will be asked to submit 6 months bank statements on all your accounts and our role as a broker would be to work through your statements to build a profile to demonstrate how the proposed mortgage is affordable. Items such as rent, savings and loans that will discontinue prior to mortgage draw down can all be taken into account.
As a rule of thumb we would suggest that for every €100,000 you want to borrow over a 30 year term you will need to show repayment capacity of €500 per month. As such €400,000 would be repayment capacity of €2,000 per month.
A lender will note that your mortgage repayment needs to be paid every month so in proving repayment capacity the key is consistency, don’t skip a month of savings, ensure there are no gaps.
I have a loan will it impact my mortgage application?
4. Loans and personal guarantees
If you have a loan in place this generally does no preclude lending but taking out a new loan before you make a mortgage application is something to reconsider. Where any new commitment is taken out a bank will generally like to see its impact on your overall finances. For example, if you are just about showing repayment capacity for the mortgage sought, with no other surplus, and you then take on a car loan of €400 per month. A bank may want to see the loan in place a number of months to assess how you manage this new loan commitment and whether it has an impact your ability to repay the proposed mortgage.
If you are self employed and a sole trader or in a partnership any loans you take will appear on your credit report and will be factored into your mortgage application, this is the case even if the business makes the repayment. If you are a shareholder in a limited company then the loan is in the limited companies name and as such will not appear on your credit report. If you provide a personal guarantee for a loan within a limited company then it will appear on your credit report and will need to be factored in.
How will I know if I have a bad credit record?
5. Clean credit record
When making a mortgage application you will sign a declaration to state that the bank can run a credit check on you. The credit check is run based on your name, age and address and will show any credit facilities of €500 or more which you have held and are now closed within the last 5 years or that are currently in place. A bank will uses your past credit behaviour as an indicator of future credit worthiness. If you have missed payments on a loan or credit card then they will appear on your credit report.
The credit report will show how many times payments were missed and if there are multiple markers on the credit report then a bank will generally decline an application.
If you have any concerns re your credit report I would advise that you apply for a copy of your credit report on the Central Credit Register (CCR), it is free to do so and it will give you peace of mind if you are concerned.
If there are negative markers on the CCR then you would need to provide a satisfactory explanation as to why payments we missed. Some lenders will consider applications where there is two clear years without any missed payments and where a satisfactory explanation is provided.
If you have lived outside of ROI in the last three years or hold accounts in any other jurisdiction then you will need to provide a credit report for the relevant jurisdiction as part of your mortgage application.
Top Mortgage Tip –
A golden rule when it comes to mortgages is no two lenders are the same, there are ten mortgage lenders in Ireland, if you go to one bank you will be missing out on what 90% of the market has to offer and chances are you will not get the best mortgage for you. Lenders all lender under macro prudential lending rules put in place by the Central Bank of Ireland but one banks interpretation of allowable income can be very different to another. A lenders assessment of variable income such as commission, bonus, overtime, shift allowance can all make a huge difference to how much you can borrow. Mortgage rates in Ireland range from 3% to 6.15%, it is so important that you understand what is the best rate for you and avoid paying needless interest.
Get advice from our team at doddl – start here
