We all know the mortgage lending rules right? But what about the unspoken rules lenders don’t talk about when you’re looking to apply for a mortgage?
There’s no denying that mortgage lending has got stricter and there are a lot of rules these lenders are following and are looking for you to meet in your application.
But there’s one unwritten rule that a lot of lenders set a benchmark at.
Debt to income ratio.
In this article we’re going to look at this unwritten mortgage rule lenders don’t talk about, giving you an idea of what you should consider when applying for a mortgage.
Mortgage lending rules
Before we get onto the unwritten rules mortgage lenders don’t talk about we should look at what the actual rules are around mortgage lending.
So what are the mortgage lending criteria?
- Limits of borrowing to 4-4.5 times your salary
- A deposit of 5% or higher
- You need to be at least 18 years of age to apply for a mortgage
- The minimum term for a mortgage loan is 5 years and the maximum term is 40 years (provided this does not take your term beyond your 80th birthday)
- A good credit report
To ensure you meet the criteria you would then need to provide supporting documentation for assessment.
Your income
Documents are needed to support your income status:
- Regular income from work, self-employment or pensions and investments
- Additional payments, like overtime, bonuses and commission
- Other income, like state benefits, rental income, trust funds and maintenance payments
Debt and regular expenses
To calculate your affordability you’ll need to provide statements and documents relating to:
- Cards and overdrafts
- Credit agreements and loans
- Property commitments
- Family commitments, including maintenance
- Pension payments
What is debt to income ratio and why is it one of those mortgage rules lenders don’t talk about?
A debt-to-income ratio reflects the proportion of your monthly income that is spent on paying off existing debts, such as car finance, credit card debt, and personal loans.
There are two types of debt-to-income ratios that you could come up against from lenders:
- Front-end debt to income – Represents only your monthly housing costs, i.e. rent or mortgage payments and house insurance.
- Back-end debt to income – What lenders would typically look at. Monthly debt obligations, including personal loans, student loans and credit card payments.
A lot of lenders don’t talk about this rule as they won’t have a debt to income ratio written into their policies yet they will stipulate that your debt cannot be more than 20% of your income, or that it can’t be more than 5 years salary.
How debt to income ratio is calculated
A debt-to-income ratio can be worked out using the following example as a guideline:
To calculate your’s you’ll need two crucial numbers, your gross monthly income (this is before tax) and your monthly debt costs.
If your monthly income is £2,000 and you spend £500 paying off debts, your debt-to-income ratio is 500 divided by 2,000, 0.25. Then to work out the percentage x100 to get 25%.
Note that your debt to income ratio typically doesn’t include basic household expenses or monthly bills for utilities, groceries and entertainment. Instead, it focuses on monthly payments from lines of credit that are regular and recurring.
What debt-to-income ratio is good?
Even as a mortgage rule lenders don’t talk about, debt-to-income ratio of less than 20% is considered the best as lenders would class you as low risk. However, a ratio of less than 50% wouldn’t normally prevent your application from being approved provided there are no other problems with your application.
The below shows a bit more detail on how your debt to income ratio would be considered by lenders:
20% or less
Depending on other parts of your application lenders will tend to look favourably at your mortgage application
20-40%
Only a small amount of lenders have a debt-to-income ratio maximum of less than 40% which means you still have a good chance of approval
40-60%
Expect greater scrutiny from lenders. Several have a maximum debt-to-income ratio of 50%
60-80%
A small number of mortgage lenders will accept a debt-to-income ratio at this level. Your credit history and deposit size will be considered, and the context for your debts.
80-100%
Most mortgage lenders will be cautious of borrowers with a debt-to-income ratio over 90%. Lenders may consider these applications on a case-by-case basis.
Why is the debt-to-income ratio important?
Lenders must understand you’re capable of meeting your mortgage payments before they approve any loans.
If you have a high debt-to-income ratio lenders become wary of your capabilities to repay your mortgage.
It’s as simple as that.
What happens if my debt-to-income ratio is too high?
If you have a high debt-to-income ratio you may find it difficult to get approved for a mortgage. Lenders want to know that you can afford your monthly mortgage payments, and having too much debt can be a sign that you might miss a payment or default on the loan.
If you’re in this situation, you could try to pay down or restructure some of your bigger debts before applying for a mortgage.
Speak to a broker who specialises in complex debt-to-income ratio cases
If you’re concerned about rules lenders don’t talk about and your debt-to-income ratio and how it could affect your mortgage application, speaking to a mortgage broker who has access to whole of market lenders. They could mean the difference between approved and declined. They know the market and know what lenders to approach depending on their criteria.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via info@theonlinemortgageguru.co.uk and we will put you in touch with a suitable specialist to handle your enquiry who has experience handling cases such as yours.
