Lender rules to be tougher on financial checks.

Deeper Affordability Checks By Lenders

New lending rules are planned to force banks to be more thorough in the ways in which they look into an applicant’s finances.

At the moment an applicant’s credit file and income details make up the brunt of the checks before a mortgage is approved in principle – however, the Financial Services Authority’s (FSA) mortgage market review is going to force a rethink for 2011.

Certain underwriting discretion will no longer be allowed and brief periods of being overdrawn, for example, will possibly mean more to the underwriting process.

When checking for affordability, banks normally take fixed monthly commitments such as loan payments, credit cards, council tax and utility bills into account. With new processes in place, banks may take things like gym memberships into account alongside these too.

The original Mortgage Market Review (MMR) found:

  • 46% of households had shortfalls or no money left once mortgage payments and livings costs were subtracted from their income.
  • Between 2007 and Q1 2010, on nearly half of all mortgages approved, the customer had not provided any verification of their income.
  • At the peak of the housing market, nearly a third of mortgages were interest-only.
  • Many mortgagors on interest-only payments were counting on house price inflation to repay the capital of their loans rather than a solid repayment or endowment plan.
  • Borrowers with poor credit history were most vulnerable.

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