Calculate Your Home Loan Possibilities
Getting a new mortgage may seem daunting, but it can still be done. Many factors are used to calculate how much a lender is willing to loan you for the purchase of a new home. For the most part, we can place these factors into three categories: your income, how much the property is worth and their estimation of your ability to pay.
What You Earn
Every lender uses their own formula to determine how much they are willing to give you during the home buying process. Most lenders are willing to give you a minimum of 3.5 times your annual salary. For example, if you earn ?26,000 per year, most lenders would be comfortable lending you around ?91,000. This of course also depends on other factors such as credit history and your outgoing expenses.
Some savvy buyers may even receive between 4 and 5 times their annual salary. Couples are typically able to get 2.5 times both annual salaries or 3 to 3.5 times the higher salary plus one year of the second salary. A couple where both people earn ?26,000 per year would be eligible for a loan of around ?130,000 using these formulas.
The idea is that every borrower has unique circumstances. For example, a couple with expensive cars and high insurance premiums will not be able to borrow as much as a couple who earns the same amount but has cheaper vehicles.
How Much the Property is Worth
Each lending firm uses its own loan to value ratio as a guide for mortgage loans. This is some percentage of the home's value given as the loan amount. For example, a loan to value ratio of 60% on a ?100,000 property would mean that your mortgage loan would be ?60,000. Some will lend up to 90 or 95% of the property's value, but 75% is the standard rate. However, the higher the percentage, the more you will likely pay in interest rates.
The value of the home is also measured against the value of the other properties located in the same area. Some lenders may refuse a loan if they feel the property isn't expensive enough for the area. More often, it's the opposite case - where a property is seen as too expensive.
The Lender's Opinion of Your Ability to Pay
Provide proof of rental agreements that match the amount of the intended mortgage if you are a first time buyer. Providing this type of information helps convince the lender that you will be able to cover the payments. You must always keep in mind that how much you can borrow is not always necessarily what you can really afford.
You may be able to get a mortgage which stretches your budget to the limit but leaves you in trouble when you have to pay the other costs involved in buying your home and its future running costs.
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