Once you have seen the property, enlist the services of an independent lawyer. Before any contract is signed, it must be ‘subject to mortgage finance’ and this provides a fall-back position if:
– You fail financially
– The property is down valued
– There are legal issues – or other problems – that may not allow you to complete (for example losing your job, family illness etc).
By applying for a mortgage, the advantage is that the bank will also check the legalities and carry out a valuation on the property, although they will not carry out a full in-depth survey unless requested. The bank will only ensure the property is good security for the mortgage you require and to check the property has not been overpriced.
Note that by applying for a mortgage, you could slow down the sales process and there may be additional bank, local taxes and legal costs.
The bank calculates how much an applicant can afford by normally only taking into account 30-33% of their total net personal income (after tax), to cover any existing liabilities (such as existing mortgages, bank and car loans, school fees, maintenance/alimony payments etc), plus the cost of the new monthly mortgage repayments.
Net income is normally calculated from employed, pension or, possibly, investment income. In most instances no rental income on the new property will be taken into account.
If an applicant has existing rentals, lenders may also not take that income into account. However if that rental income is from multiple properties and separate audited accounts are available, the net profit could be taken into account. They may also request a tax return to substantiate this additional income.
A lower loan-to-value or a higher deposit may not affect the maximum amount you can borrow as, since the world economic crisis, it is primarily down to affordability.
If you are employed, it is ideal if you have been employed in your current job for at least 6-12 months. If it is less than that, a potential lender will need to know of any remaining probationary period, and you are also likely to be asked for your latest CV showing your job experience.
Any bonuses, overtime or commission are only likely to be included if it is guaranteed, or possibly if there is a long-term track record.
If you are self-employed you will ideally have at least three years’ trading history with a minimum of two years’ profitable accounts (confirming both gross turnover and net profit for those years). There must be a full explanation for any drop in turnover/profit and, of course, any losses incurred.
If an applicant has more than 20-25% shareholding, they are normally deemed by a potential lender to be self-employed.
If the self-employed applicant is based outside of the UK, their accounts must ideally be prepared by a recognised international firm of accountants to be accepted by a potential lender.
Other commitments which need to be taken into account are bank loans, car loans and leases, school fees, maintenance and alimony payments and credit card balances, which need to be cleared even if it is a 0% interest deal.
However, if a loan or other expense is paid for by a business, then any of these costs may not affect a personal mortgage application. In this case, you must show at least three to six months’ history of the business account paying these expenses, but if you have any defaults, missed payments or CCJs, you are unlikely to be accepted.
Pension and investment income may also be considered on a case-by-case basis.
The maximum age a mortgage can finish differs from country to country, ranging from 65 to 75. The majority of lenders will ask for proof of income after the normal state retirement age.
· Simon Conn is the proprietor of overseas property and finance specialist firm, Simon Conn