Mortgage Lending Criteria

As we all know when it comes to borrowing money in any form be it on HP, Credit Card, Secured or Unsecured loan or Mortgage each lender has its own criteria for evaluating whether you are an acceptable risk to them.

We all lead different lifestyles and don't all fit into the same catagories that lenders very often look for. So the question is......

What if I don't fit the lenders criteria?

There are generally two types of 'Non-standard borrowers and these usually come under two main types.

1. The self-employed and directors with large % holdings in their own companies.

2. People with past financial problems, which may include CCJ's, bankruptcy, arrears etc.

If you fall into one of these categories, you may find it difficult to convince a lender to give you a mortgage.

Why is this the case you may ask.

If I am Self-Employed - The main concern that most lenders have if you are self-employed is that you won't have a regular, stable income and therefore there is the risk that you won't be regular in your repayments to them. In order to reassure them, and because you won't be able to produce payslips from an employer, (i.e you are in fact the person producing your own payslip), you will need to produce some other proof of your income. This is usually in the form of validation from a Certified or Chartered Accountant who will need to provide the accounts from your last three years income. They will often ask to see your company accounts and also yours and business bank statements for the last 6 months.

Anyone who is not able to produce that information is unlikely to meet the borrowing criteria of the usual high street lenders, which tend to use set methods of credit scoring to validate an application, and have higher criterias to meet than specialist lenders in this sector. There are now though a growing number of lenders, including a few high street names, offering specialist home loans aimed at this non-standard market. They tend to underwrite each loan individually, which means they can be more flexible in their approach.

Some lenders also offer the opportunity for self-employed customers to certify their own income on the application form. These mortgages are known as Self Certification or Self Cert mortgages. This is particularly useful for borrowers who have several income streams, such as from property rented out as well as regular employment, which they want to use for the mortgage, but are unable to show is the standard lenders format. With these loans, however, you will usually need to be able to put down a larger deposit on the property, perhaps 25%, and you may find that the interest rate is a little higher, often 1/4 - 1/2% more.

If you own a business that is seasonal or prone to income fluctuations, you may find a flexible mortgage will suit you better than a standard mortgage. With flexible mortgages you can make over or under payments so that you can pay more than required when business is good and during the slower periods underpay or take a payment holiday. It must be noted however that most lenders only allow you to underpay on a flexible mortgage to the amount that you have already overpaid.

Regardless of your own situation whether you are self-employed person or have in the past had financial problems, your situation will be greatly helped if you have saved up a deposit. The highest a non-standard lender will usually loan is 90 percent loan to value (LTV), meaning you will need at least a 10 percent deposit to secure a loan.

Bad / Adverse Credit

Very often people are completely unaware they have County Court Judgements (CCJs) against them until they apply for credit or a loan of some kind a mortgage application being one of them. Once applied for it will then be rejected and you will then need to find out how you are able to clear any bad records against your name. In fact, over three million people in the UK have CCJs and what many don’t realise is that they stay on record for six years.

Before any loan or mortgage application is approved lenders will use credit reference agencies to check whether you, as a borrower, represent a safe bet. If your application is turned down, ask the lender to give you the name of its credit reference agency, who is required by law to give you details of your credit file.

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Lenders will take into account the details of your individual case. They will look at how many CCJs you have had, the amount of the debt and how quickly your debt was settled. They will also consider your current income and savings record. If your difficulties arose from circumstances out of your direct control, such as a recession or the break up of a marriage, lenders are now more likely to consider you. The major issue for the lenders is stability so the longer you have been back on your feet, debt free and saving, the better it will be for you. You may find you have to pay a higher than normal interest rate for your mortgage initially but, once you have been making your repayments on time for a set period some lenders will let you move to the Standard Variable Rate, (SVR).