The foundation of home-buying lies in your borrowing capacity and whether you’re a newbie or veteran, it’s important to understand how this is assessed. In a nutshell, your ability to take out a home loan will depend on the specific lender you’re working with. They may consider your overall income as well as your financial dependents in order to determine whether they’re willing to take the risk with you or not.
Required Information to Determine Borrowing Capacity
Most lenders will ask you to provide the following standard information.
- The number of applicants on your mortgage
- The number of financial dependents
- The amount of your annual salary before tax and other regular income
- The amount of rental income you receive from other properties
- Your average amount of living expenses
- Other loan repayments and commitments
- Your combined limit of credit and store cards and overdrafts
Contrary to what most borrowers may think, your day-to-day affects your borrowing capacity more than your spending habits. Thus, it’ll hardly ever correspond to your spending patterns.
What Affects Your Borrowing Capacity?
While your income and financial dependents make the biggest impact on your borrowing capacity, lenders may also consider:
A high credit score will communicate to lenders that you reliably meet your financial obligations. Missed bills and credit card payments can tarnish your credit and harm your ability to receive a loan. As a rule of thumb, review your credit history and address any problems prior to taking out a mortgage.
Inclusive of school feel, child care fees, and other related stipends, living expenses can determine how your mortgage repayments will fit in. As with any other expenses that lenders usually take into account, it’s important that you calculate your living expenses with the Household Expenditure Measure (HEM) beforehand. This will reveal a median expenditure based on basic expenses along with 25% of discretionary expenses.
To prove a positive borrowing capacity, lenders will also ask for payslips and evidence of any bonuses collected on top of your regular income. These records might also include passive income from other rental properties or investments you’ve made.
The Type of Loan Applied For
To accurately depict your repayment capacity, lenders will often peg your interest rate at an amount that is 2.5% higher than the rate at which the loan is actually offered. Fixed-loan rates, on the other hand, won’t assess borrowing capacities with a buffer. If you aren’t sure about which loan to take out on a home, consult with a mortgage broker in order to properly weigh your options.
When you think of a loan, you can’t forget the deposit. The larger a deposit you can put down on a home, the better your borrowing capacity appears. After all, lenders want to know that you can properly put money away over a certain period of time. A threshold of 5% of your genuine savings can seal the deal with most lenders.
Having a strong grasp of your borrowing capacity isn’t just for a lender’s sake. Knowing where you stand financially can help you narrow down your options if one doesn’t seem to fit right with you.
At Finance Corp, we make investing easy! Whatever loan you need, we’re always ready to help. If you’re currently on the hunt for a home loan, car loan, business loan, or otherwise, contact us today!