Topic 10: Assessing the applicants financial status

Question 1

What is Turnover?

Answer 1

The total amount of income received by a business, before any deductions.

Question 2

What is Gross Profit?

Answer 2

The business’s turnover less the cost of making/selling goods or services. This includes the costs of buying materials, direct labour and items bought to sell.

Question 3

What is Net Profit?

Answer 3

Gross profit less the costs of operating the business, such as administration and other overheads.

Question 4

What is a Profit and Loss Account?

Answer 4

A record of a business’s income and expenses for a trading year. It shows gross and net profit for the year.

Question 5

What is a Balance sheet?

Answer 5

A statement of a business’s assets and liabilities at the trading year end. Includes the balance of the capital account.

Question 6

What is a Capital account?

Answer 6

Contains details of any capital owned by the business. It will include any capital remaining from the injection of cash to start the business, any capital injected since start-up and any surplus profits retained from previous years. It will also show personal drawings taken by the owner(s).

Question 7

What is Personal Drawings?

Answer 7

Money withdrawn from the business by the owner(s), which could be more or less than the profit made by the business in that year. Lenders will not take drawings as income for mortgage purposes, because they could come from previous years’ profits or even borrowing

Question 8

What is a Close company?

Answer 8

A privately owned company controlled (through shares) by no more than five people, known as participators. Usually applies to family companies and small companies.

Question 9

What is a Participator?

Answer 9

An individual (or their ‘associate’) with a financial interest in a close company, usually as a shareholder or a director, but also as a creditor. ‘Associate’ can include spouse, civil partner, partner, parent, child or sibling.

Question 10

What is a Director’s loan account?

Answer 10

A record of money owed to a participator by the company and loans from the company to a participator. If a participator is owed money from the company they are in credit in the account. A participator in credit can withdraw money from the director’s account as and when they wish, tax free. The company can also provide loans to a participator, who would have a debit with the director’s account.

Question 11

What is Committed expenditure?

Answer 11

Contractual commitments such as credit agreements and loans that will continue after the new mortgage is entered into.

Question 12

What is Basic essential expenditure?

Answer 12

Day-to-day spending needs, such as food, utilities, council tax and insurance.

Question 13

What is Basic Quality of life expenditure?

Answer 13

Non-essential spending that is an important element of a reasonable standard of living, such as clothes, household and personal items or recreation.

Question 14

What is Free disposable income?

Answer 14

The borrower’s net income after tax, National Insurance contributions and personal expenditure.

Question 15

What is a Credit-impaired customer?

Answer 15

A customer who has had credit problems in the recent past, eg owes the equivalent of three months’ payments on a mortgage/loan in the past two years, one or more CCJs exceeding £500 in the past three years, or an IVA or bankruptcy order in the last three years.

Question 16

What is a Stress Test?

Answer 16

Assessing a mortgage applicant’s available income against the mortgage they require but with an increased interest rate. Considers the applicant’s ability to continue to make repayments should borrowing became more expensive, ie if interest rates increase. Not required where the initial interest rate is fixed for at least five years.

Question 17

WHO COMPLETES THE APPLICATION FORM?

Answer 17

Whether the application form is completed by the applicant or by the mortgage adviser, the applicant should be encouraged to submit correct and unambiguous information that requires
minimum effort to corroborate. If the adviser completes the form,
the applicant must check it carefully for accuracy. Ultimately the accuracy of information is the applicant’s responsibility.

Question 18

WHAT DOES THE LENDER NEED TO KNOW ABOUT THE LOAN REQUIRED?

Answer 18

• Advance required, and % of the purchase price
  this represents (loan to value)
• Deposit available
• Repayment method
• Buildings and contents insurance requirements
• Other insurance requirements

Question 19

What types of income are taken into account?

Answer 19

• Employment
• Self-employment
• Directorship
• Other secured income (maintenance, pensions etc)
• Secured trust income

Question 20

How is income from self‑employment assessed?

Answer 20

The assessment of ‘salary’ for a sole trader is a little more difficult. Most lenders take the business’s net profit as income when assessing affordability,
and Figure 10.3 outlines how the net profit figure is arrived at. Lenders will
usually want to see evidence of the business earnings for at least two to
three years. Some will consider applications from sole traders with a shorter
business history but may apply additional criteria.

Question 21

What comprises a directors pay?

Answer 21

• Salary (if they are employed)
• Dividends
• Directors loan