How Do Lending Multiples Work
When it comes to households with two incomes, some lenders offer a choice:
- The option to add the second income on top of the multiple, so if the main breadwinner earns £30,000 and the second persons income is £15,000 a lender might offer 4x the first income, plus the second income or
- A slightly lower multiple for two incomes than for one. So £30,000 + £15,000 = £45,000. Then £45,000 x 3 = £135,000
Many lenders now only use income multiples as an overall maximum that they will lend, conducting a detailed affordability assessment to decide how much they will actually let you borrow. All income you declare in your mortgage application will need to be proven, usually through you providing your latest pay slips, pensions and benefits statements.
Mortgage Preapproval Confirms Your Home Buying Budget
Its a good idea to figure out how much home you can afford before you start shopping so that you avoid falling in love with a property you wont be able to buy.
In addition to getting an estimate through an online mortgage calculator, you can apply for preapproval with a lender to get a better idea of what they might offer you.
That allows you to search for homes in your price range, and it reassures your real estate agent and sellers that youre in the right ballpark when youre touring homes.
You can get started by requesting todays rates from top lenders.
What To Do If A Lender Refuses Your Mortgage Application
A lender could refuse you for a mortgage even if youve been preapproved.
Before a lender approves your loan, theyll verify that the property you want meets certain standards. These standards will vary from lender to lender.
Each lender sets their own lending guidelines and policies. A lender may refuse to grant you a mortgage if you have a poor credit history. There may be other reasons. If you dont get a mortgage, ask your lender about other options available to you.
Other options may include:
- approving you for a lower mortgage amount
- charging you a higher interest rate on the mortgage
- requiring that you provide a larger down payment
- requiring that someone co-sign with you on the mortgage
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How Much Can I Borrow For A Mortgage Based On My Income
Prior to 2014 lenders would use an income multiplier to help decide how much you could borrow on a mortgage. Now lenders need to show that the mortgage is affordable and that you could continue to pay your mortgage should there be a rise in interest rates, or you have a significant change in circumstances such as losing your job or having a child.
Lenders also have regulatory restrictions that limit their new lending above 4.5x salary to a maximum of 15% of all new mortgage loans. This means lenders can be very specific in deciding exactly which borrowers they want for these mortgage deals.
To find out more take a look at our What are mortgage affordability checks guide.
Speak To An Expert Today
We understand that each situation is unique. If you would like a detailed insight into how much you could borrow on a mortgage from your household income, get in touch today.
Call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. It costs nothing to make an enquiry and theres absolutely no obligation or marks on your credit rating.
Ask us a question
Want to know exactly how much you could borrow based on your income?Drop us a query with your exact income and we will have an expert broker answer any questions you have about how much you could borrow.
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Online Mortgage Advisor is a trading name of FIND A MORTGAGE ONLINE LTD, registered in England under number 08662127. We are an officially recognised Introducer Appointed Representative and can be found on the FCA financial services register, number 697688.
The Financial Conduct Authority does not regulate some forms of buy to let mortgage.
Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.
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Have A Question About Our Mortgage Calculators
What is a mortgage calculator?
Its a tool that gives you an estimate of how much you could borrow from us or what your monthly repayments and other costs might be, for a mortgage in the UK.
We have different calculators that can help you in different ways each calculator does something slightly different.
Who is a mortgage calculator for?
Its for you if youre a first time buyer, youre looking to remortgage, move or buy an additional home, or youre a buy-to-let landlord.
What information do I need to use a calculator and how do you decide what I can afford?
When you apply for a mortgage or use our calculator, well ask you for information like
- How many people are applying
- Your income
- How much you regularly spend on things like your credit or store cards, loans, overdrafts, maintenance and pension
- Why youre applying for example, buying your first home, moving home, or buying a second home
We wont ask about groceries, utility bills or travel.
How much can I afford to borrow?
Our calculators give you a idea of what you might be able to borrow from us to buy a home, and what your monthly and total mortgage payments could be, for different types of mortgages.
Which mortgage calculator is right for me?
The most popular place to start is our borrowing calculator or our affordability calculator.
Increase Your Down Payment
If you have the cash, you may want to up your down payment to 10 or 20 percent. A down payment raises your maximum home price, which may be enough to buy a home that you want.
If you dont have the cash, keep in mind that you can ask relatives for gift money.
You can also apply for homebuyer assistance programs from state and local government programs that provide down payment and closing cost funds. Your eligibility for these programs may vary based on your personal finances.
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How Are Mortgage Repayments Calculated
To calculate a mortgages monthly repayment, youll need to know the value of the home youre buying, your deposit, the interest rate and the length of term.
- Deposit – £50,000
- Mortgage amount – £200,000
- Mortgage term 30 years
- Mortgage rate 2%
If the mortgage rate in this example was fixed for the length of the 30-year term, youd pay 360 monthly instalments of £739.24. This pays off the £200,000 loan in full, along with a total interest amount of £66,126.
Its important to remember that, as you begin to pay off your mortgage, the interest owed begins to fall in line with the outstanding amount on your mortgage thats owed. This means youll slowly be charged less in interest as the years go on. During a fixed term however, youll be charged a fixed, regular amount.
|Year of mortgage|
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How Do Lenders Assess Affordability
The way lenders assess affordability wont be exactly the same for each provider, but essentially, they follow the same principles. Theyll look at your situation in more detail than our calculator does. Although our calculations give a good estimate, a lender may come to a slightly different conclusion.
Essentially, the mortgage lender have their own mortgage calculators and their scorecard will look at things like:
- The amount of money you want to borrow
- How much deposit you have
- Your employment status and job security
- Your income and lenders may view things like overtime, commission and bonuses differently from basic salary as theyre not guaranteed
- Your outgoings the money you spend on bills and on your lifestyle
- Any existing debts
- Your credit report
When looking at your credit report, its not just your overall score that potential mortgage lenders consider. Theyll also look in detail at:
Lenders are likely to look at your bank statements for the last three to six months to show them what your spending is going on and how well you manage your money and finances. Youll need your most recent P60 as proof of earnings too. You could also provide information about your savings accounts and other assets like shares, on your application form, as evidence of your ability to save and manage money.
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What Else Do I Need To Get Approved For An Fha Loan
Sufficient income is one of the most important things a person needs to get approved for an FHA loan. Its also the main factor lenders use when determining how much mortgage a person can qualify for.
But there are other things youll need to get approved for an FHA loan.
- Down payment: The minimum required down payment for FHA borrowers is 3.5% of the purchase price or appraised value, whichever is less. So be sure to account for this when figuring out how much house you can afford.
- According to HUD guidelines, borrowers need a credit score of 580 or higher to get approved for an FHA loan with maximum financing . Lenders sometimes require higher scores.
- Manageable debt: We talked about the debt-to-income ratio above. Its another one of the key requirements for the FHA mortgage program.
This article answers two common questions we receive from borrowers: How much of an FHA loan can I qualify for with my income? How much of a house can I afford to buy?
Its important to think of these questions separately, because they are two different things. We encourage all borrowers to establish a basic housing budget, before starting the mortgage application process.
The bottom line is that the FHA does not require a minimum income for this program. Thats generally left up to the lender, as long as the debt ratios look good. Nor is there a limit on how much you can earn.
Do Mortgage Calculators Require A Credit Check
No, you wont need to undergo a when using mortgage calculators, as the only information youre inputting is your basic salary no other personal details are required. This means therell be no searches appearing on your credit report and no impact on your score, but if youre concerned that your current score may be holding you back from getting the best deals, nows the time to work on improving it. Find a free credit check service.
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How To Determine How Much Home You Can Afford
Buying a house is exciting, especially as you tour new places and eventually fall in love with a home. But how do you determine your price range? To set realistic expectations, consider your personal finances, borrowing options, and the total costs of buying.
Heres what well cover:
What Is Principal And Interest
The principal is the loan amount that you borrowed and the interest is the additional money that you owe to the lender that accrues over time and is a percentage of your initial loan. Fixed-rate mortgages will have the same total principal and interest amount each month, but the actual numbers for each change as you pay off the loan. This is known as amortization. You start by paying a higher percentage of interest than principal. Gradually, youll pay more and more principal and less interest. See the table below for an example of amortization on a $200,000 mortgage.
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How Much Deposit Do I Need For A Mortgage
In an ideal world, as much as possible. This means youll need to borrow less, so youre likely to pay less interest overall. To see what kind of impact having a larger or smaller amount of deposit could make to you, simply use the sliders on the deposit amount in section 2 How much will I pay?
Youll see the monthly amount you need to pay going up or down according to the size of potential deposit.
This is because one of the most important things for mortgage lenders to consider is the loan to value ratio the amount youre borrowing compared to the overall cost of the property. Often, the lower the LTV, the lower the rate of interest you might be charged. The higher it is, the riskier it is for a lender as they might not get all their money back if they had to sell the property, should you default on the loan.
Some lenders will have different rates for 100% mortgages, 95% mortgages, 90%, 85%, 80% mortgages and so on. Being able to move down to a lower band could save you money over time. Its worth checking to see if increasing your deposit, even by a few thousand pounds to help you switch to a different band, could positively impact your monthly payments.
Also remember that your deposit isnt the only factor that lenders consider when deciding what rate to offer you.
How To Improve Your Credit Rating
- Having a balance too close to your limit can decrease your credit score. Keeping your overall usage low by paying down your balance even if its only the minimum amount.
- Carrying high credit card balances can decrease your credit score. Keeping your balances low by paying down or consolidating your credit cards will improve your credit score.
- Making at least the minimum payment on time is important to maintain or improve your credit score. It’s a good idea to set up automatic payments to make sure you are never late.
- Maintain a mix of credit, such as a credit cards, an auto loan, and a line of credit. Responsible use of credit cards and loans will produce a better credit rating than no history at all.
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Estimate How Much House You Can Afford
To help you get started, you can use our calculator on top to estimate the home price, closing costs, and monthly mortgage payments you can afford based on your annual income. For our example, lets suppose you have an annual income of $68,000. Youre looking to get a 30-year fixed-rate loan at 3.25% APR. For your down payment and closing costs, youve saved $55,000. See the results below.
- Annual income: $68,000
|Total Monthly Mortgage Payment||$1,587|
Based on the table, if you have an annual income of $68,000, you can purchase a house worth $305,193. You may qualify for a loan amount of $252,720, and your total monthly mortgage payment will be $1,587. Since your cash on hand is $55,000, thats less than 20% of the homes price. This means you have to pay for private mortgage insurance . Take note: This is just a rough estimate. The actual loan amount you may qualify for may be lower or higher, depending on your lenders evaluation.
The following table breaks down your total monthly mortgage payments:
|Monthly Payment Breakdown|
|Total Monthly Mortgage Payment||$1,587|
According to the table, your principal and interest payment is $1,099.85. When we add property taxes and home insurance, your total monthly mortgage payment will be $1,481.34. But because you must pay PMI, it adds $105.30 to your monthly payment, which results in a total of $1,587 every month.
What Else Will I Need To Get An Fha House Loan Approval
The required income plays an important role in the overall process of getting an approval, however, there are things you can have in mind in order to make it work like a charm. And who doesnt want that?
Herere a few things that a mortgage lender will look out for:
Debt-to-Income Ratio: Weve already talked about it above briefly. If you need to know about it in detail, weve suggested the same through a link above. See why a DTI is important in getting loan approval on behalf of a mortgage lender.
One of the things that have an effect on the approval is your Credit Score which, in accordance with HUD, must be 580 or more than that i.e., in order to get approved for an FHA loan with the highest financing . The FHA mortgage lenders may often ask for the higher credit scores.
Down Payment: Among others, the down payment required for an FHA loan is also significant. One who is lent an FHA loan is required to pay 3.5% of the appraised value or the purchase price. Therefore, this is something you must pay heed to when comprehending how much house you will need to afford for an FHA loan.
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