The criteria applicable for borrowers when applying for the loan are different; and so is the amount that they are eligible to receive. The following article discusses this in detail.
Since the credit crunch of 2007, lenders have been very stringent in the application of the criteria when considering loan applications. The money that a person can borrow largely depends on his income, and other factors such as his current debt and other financial commitments.
Borrowers applying for a loan are usually asked to provide their latest salary details, information on the number of dependents, monthly household expenses including payment of loans if any, etc. Lenders also scrutinise the applicant’s credit rating and check for his financial position; they either charge higher rates of interest or refuse to lend when borrowers have less than stellar ratings.
For instance, the self-certification mortgage that was designed for self-employed borrowers whose income is difficult to assess is now available under limited circumstances and also require the borrower to deposit at least 25% or more of the amount.
Besides the above criteria, the maximum loan amount is further determined by the lender’s evaluation of the property. It should not be more than a fixed percentage of the lender’s valuation of the property, also known as the loan-to-value ratio. This fixed percentage usually varies according to the lender and the type of property.
The present market scenario has made it almost impossible for lenders to lend more than 90% of the valuation. Such a fixed percentage will vary according to the age of the property purchased. While 90% is the maximum limit for a new property, it may vary from 70 to 80% for an old property.
The valuation of the property is almost always less than the price asked for the property and when the lender agrees for a rate higher than the normal evaluation rate, he does so because of a single premium insurance policy (paid for by the borrower). And when the lender is forced to exercise his power of sale, the insurance policy protects the lender from any loss that may be incurred due to having lent more than the normal rate of value. Such mortgage policies are not encouraged because they are paid for by the borrower, but protect the lender. Also, the borrower does not have a right on the property if it is sold at a loss. But thankfully, today most lenders do not require such policies or undertake the costs of this insurance themselves.
When the property is let, the lender also includes the interest rate cover ratio to make sure that the borrower has sufficient means to pay back the monthly interest throughout the period of the loan. Such lenders usually insist that the income from the rent should exceed the mortgage repayment by a certain percentage.
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