It may seem easy to work out how much you earn, but when you are trying to get a mortgage to buy your first home you need to understand how the banks and lenders calculate your income differently from each other and it might be a bit different to how you would.
The lenders will look at your income and scale it depending on the type of income and how consistent it is.
It is important to calculate the income correctly and present this well to a lender so they accept what you are saying your income is. What you present needs to make sense to the lenders so they can assess it within the banks policy.
Banks Are Not All The Same
Most people think that banks all assess income in the same way.
It’s logical surely!
If your income is a standard and consistent salaried income then this part is relatively easy; however for a lot of people their income is a bit more complex.
Even when it seems simple the way lenders calculate income differently can mean they get different results.
Think about how your income is made up … there may be a base salary or you may be on wages and paid by the hours worked. You may receive overtime and allowances or bonuses. Some people are on commission or self employed, and then there are the other types of income that your household may receive such as an accommodation supplement, working for families, child support or you may have a boarder or flatmate.
Banks have policy which dictates how much of your income they can use when assessing what amount of lending you can afford.
And that is before they start to look at your expenses and outgoings.
The various banks and lenders also have their own unique ways in which they treat different income which means that with one bank they may say that you do not earn enough while another bank are comfortable that you do.
Which bank would you apply with?
Most people will automatically think of the bank that they already have an account with; however this may not be the best bank to apply with.
A good mortgage adviser will be able to compare the different banks using the banks own policy. They do this as part of their assessment and before submitting your application ti a bank.
Assessing Income For Low Deposit Lending
Banks will generally have a harder criteria when you have less deposit. They may have a set of rules that apply when you have a 20% deposit or larger, but when you have less than 20% for a deposit then they have stricter rules.
The reason for this is the higher risk of defaults when the borrower (you) have less of your own money in invested in the property.
The less equity that you have, the higher change that some small hic-up could cause financial stress, and there are less options for sourcing additional finance should it be needed.
This adds another twist to the complex subject of how the banks and lenders calculate your income.
This is another reason that I created the course for first home buyers … to empower you with the knowledge so you can make the right choices.