Approval criteria when granting a mortgage
Following the last economic crisis, the real estate market seems to be on the mend, though at a very slow pace. Banks are once again granting mortgages, albeit more cautiously (no longer do they finance 100% of the total value of the property, and nor do they offer such long repayment periods).
In the current climate, we may be in for a long wait if we ask our bank for a mortgage loan to purchase a home.
What requirements will they insist on when deciding whether to grant us a mortgage? What aspects will help us secure our mortgage?
While there are some differences between banks, they all largely follow the same criteria in that their main concern is the borrower's repayment ability.
- More precisely, the most important factors are the valuation amount and the purchase price. As we have been saying, banks are generally unwilling nowadays to finance more than 80% of the purchase price, not so much because of the risk of non-payment by the borrower; more because of the risk of the mortgaged property falling in value. That said, the lower the amount we request, the more likely it will be that the bank will grant us the loan.
- Another important point is our ability to repay the amount we borrow, or, as it is commonly known the debt to income ratio. To calculate this, the bank will assess our net income, mainly by looking at our salary, though also other income such as rental or pension income, provided we have declared it in our tax return and can prove it.
- As a rough guideline, when paying monthly instalments on our loan, we should not be spending more than 30% of our regular income. It is best to make sure that we can afford to pay it comfortably, especially in the case of variable-rate loans, in which the instalments can and will fluctuate over time.
- Job stability is another point that counts in our favour when attempting to secure a mortgage. The more reliable our solvency is, the better. The bank will look at a historical summary of our working life (industry and type of contract, seniority at our company, whether there have been any gaps in our employment, etc.). Offering a guarantor to reduce the risk of non-payment may also reassure the bank and therefore count in our favour.
- The bank will also check our existing debt or debt capacity and look for any late payments or defaults. In the first case, they will calculate all the income that we declare. Note that self-employed workers who do not declare everything they receive may be at an disadvantage here. When it comes to late payments and defaults, they will request information from the relevant credit agencies and databases: Asnef, RAI, CIRBE, etc.
- Once these aspects have been scrutinised, we will obviously have to present all the paperwork requested by the bank. Failure to do so will likely cause the bank to decline our mortgage application. This includes personal documents showing our age and marital status, job, employment contract, account statements, documents proving we have no other debts, etc.
- It may also help our chances if we arrange other products with the bank. Although from a legal standpoint the bank has no right to insist on these related products, in practice the more products we arrange with the bank, the better the bank can get to know us and the better our chances of it saying yes to our mortgage.
In any case, before taking the plunge, it is important to compare what each bank is asking for and see which product would be the best fit.