How do banks determine the mortgage risk profile?
When we apply for a mortgage, how do we know if it will be approved? The likelihood of the bank granting the mortgage largely depends on our mortgage risk profile, although individual banks are more or less flexible in their conditions.
To give you a quick idea of your chances, here are some aspects that the bank will consider.
The basic criterion that will be considered is our ability to make the mortgage repayments every month. This involves analysing data such as:
- Our age and family and personal situation. According to the banks, mortgage holders should not be over 75 years of age at the end of the loan. Our work situation. Banks may want to see our work history, e.g. time with the company, continuity of employment and periods of unemployment, type of contract (permanent, temporary, public servant, placement, self-employed, etc.) and so on.
- Our income. The monthly mortgage repayment should not be more than 30% of our net income. The bank may ask us for our most recent income tax return, payment slips for other loans, payslips and supporting documents for other sources of income, if we receive other income such as rent and pensions.
- The assets or property you own. In other words, your movable and immovable property (properties, premises, garages, etc.). The entity can find this information in the Property Registry.
- Any debts and non-performing loans, which they can find out from the CIRBE (Banco de España's Risk Information Centre), a database containing our profile and records as applicants.
- Our debt level, which is calculated by adding up the income of our family unit, establishing mortgage repayments not exceeding 40% of this sum.
The entity will request our most recent personal income tax return and our CIRBE report from the Banco de España to perform these mortgage risk checks. Each credit institution has its own assessment procedure, supervised by the Banco de España.
If this assessment is favourable when we apply for a mortgage, the bank will grant it; if not, it will inform us in writing, giving the reasons why it is turning us down. If the bank performs this creditworthiness analysis incorrectly, it can only cancel the loan if the customer deliberately withheld some information.
What about mortgage risk in the Covid-19 crisis?
We learn from our mistakes. As there were so many mortgage defaults in the previous economic crisis, the banks are being a little more cautious with Covid-19, but not to the extent of changing their risk criteria or policies for granting loans.
In general, mortgage risk is still being evaluated based on our ability to meet our monthly repayments regularly, with the main factor determining approval being the buyer's purchasing power. However, this has fallen due to high job losses and lower income.