10. Assessing the Applicant’s Financial Status Flashcards
The assessment of affordability is subject to the detailed requirements of which chapter of MCOB?
MCOB 11
Once a prospective mortgage customer has decided to go ahead with an application what is the next step?
To complete the lenders application form. The application form can be completed by the mortgage advisor or the applicant. If completed by the mortgage advisor the applicant must check that all information is accurate and it is the applicants’ responsibility that it is
What applicant information is required to be gathered for the application?
- Names and addresses of the applicants
- nationality and residential status
- marital/civil status and number and ages of dependants
- occupation and nature of employment
- employers name and address
- length of time in current employment
- income
- all regular expenditure
- information on debts bankruptcy and court judgements
When gathering information for the application why do we need names and addresses of the applicants?
The lender is required by the proceeds of crime act 2002 and money laundering regulations to check the applicants identity. Generally at least two pieces of identification are required. If the applicants address has changed in the last three years, a previous address also may be required. The lender must also find out the basis on which the applicant is living in the current property i.e. are they renting or living with parents, for example?
When gathering information for the application why do we need Nationality and residential status?
It is illegal to discriminate on the grounds of nationality or race, but many lenders specify the mortgage business can only be accepted on normal terms if the borrower is resident in the UK. This is for control purposes, in the event of mortgage loss it is difficult to sue a non-resident
When gathering information for the application why do we need marital status and number and ages of dependents?
This gives the lender a view of the family unit.
If any dependents are aged 17 or over and they are not to be party to the mortgage they will usually be asked to obtain a consent to mortgage form so that an overriding interest is not created.
When gathering information for the application why do we need occupation and nature of employment, employers name and address and length of time in current employment?
Permanent, temporary, fixed term, et cetera
we need the employers name and address to confirm income and employment details
We need the length of time in current employment because if the applicant has been employed by their current employer for less than, say, three years, details of the previous employer required
When gathering information for the application why do we need details of income?
The details provided here should separate basic earnings from other forms of income. A person earning £600 per week, for example, may be on a basic salary of one third of that, with the difference made up of sales related bonuses and commissions.
If bonuses and commissions are to be considered, a conservative view should be taken. Many lenders take an average of non-guaranteed income over a stated number of years, for example 3 years, to ensure that mortgage payments remain affordable if income fluctuates
When gathering information for the application why do we need Information on debts, bankruptcy and court judgements?
Most lenders run applicant details through credit checks, and use a credit scoring system in order to eliminate unsuitable applicants, as well as to indicate the likely degree of risk
What does the lender need to know about the loan required?
- Advance required, and percentage of the purchase price this represents (loan to value)
- deposit available
- repayment method
- buildings and contents insurance requirements
- other insurance requirements
With regards to the application, what is the signed declaration?
It must be signed and dated by all applicants and confirms the information given is correct to the best of their knowledge.
It also authorises the lender to make all necessary enquiries relevant to the application and warns the applicant that appropriate action will be taken, including referring the case to the police if it is believed information given has been used deliberately to defraud the lender
In the application what types of income at taken into account?
Employment
Self employment
Directorship
Other secure income: child maintenance, pensions, etc
Secure trust income
Other than a basic salary, what are the types of additional income might employees receive?
Car allowance // location allowance // mortgage subsidy // shift allowance // overtime // commission // other sales-related income
The lender will evaluate the stability and lifespan of additional income and decide how much, if any, to take into account.
Most lenders will take a percentage of guaranteed overtime into account, or include an element of additional income if it can be shown that it has been regular over a certain period of time
How is income from self-employment assessed?
Most lenders take the business’s net profit as income when assessing affordability. Lenders will usually want to see evidence of the business earnings for at least two or three years. Some will consider applications from sole traders with a shorter business history but may apply additional assessment criteria
How are business’s net profits calculated?
1) Turnover: Total amount of income the business received from sales or providing services
2) Gross profit: Business’s gross turnover less the cost of any raw materials necessary to carry out the main trade or goods bought to sell for the business
3) Net profit: Gross profit less routine business expenses
