Unit 4:10 Borrower Affordability Checks Flashcards
1
Q
Mortgage Application Form Contents
A
Personal information:
- Names, addresses, and identity details
- Nationality and residency status
- Marital status, dependents, and family information
- Occupation, employment type, employer details
- Income breakdown (salary, bonuses, commission)
- Regular expenses
- Debts, bankruptcies, court judgments
- Property information:
-Property value
-Available deposit
-Repayment method
-Insurance requirements
2
Q
Mortgage Application Declaration
By signing, the applicant gives the lender authority to:
A
- Conduct all necessary checks before offering the mortgage
- Verify all information provided on the application
- Contact third parties to confirm details (credit score, jobs etc)
- Perform credit checks and affordability assessments
- Validate identity and address information
3
Q
Income Applicants Can Declare
A
- Employment Income
- Self Employments Earnings
- Secure Trust Income
- Maintenance and Pensions
- Directorship Income
4
Q
Evidence Allowed With MCOB Rules
A
- Latest payslips for basic salary and guaranteed allowances (3-6months)
- Past payslips for non-guaranteed income (to prove regular rhythm)
- For quarterly bonuses, the last three quarterly payslips or award letters
- Self-assessment taxation calculation for self-employed applicants
5
Q
Sole Traders’ Income Assessment
A
- Lenders focus on net profit for affordability checks
- Typically require 2-3 year history of business earnings
- Income breakdown in 3 steps:
- Turnover check: Total income from sales/services
- Gross profit scrutiny: Turnover minus cost of materials
- Net profit (take home) evaluation: Gross profit minus routine business expenses
- Documentation typically includes SA302 forms and tax overviews
- Business stability and growth trend important factors
- Net profit usually averaged over assessment period
6
Q
Self-Employed Income Documentation
A
- HMRC tax calculations for last 2-3 years from self-assessment tax return
- Accountant’s certificate confirming business income (must be from certified professional)
- Full business accounts for larger mortgage applications
- For businesses below VAT threshold: “short” tax return showing turnover, expenses, and net profit
- Above VAT threshold: detailed tax return required
- Lenders may request accountant verification of figures for additional assurance
- Documentation requirements vary based on business size and structure
7
Q
Business Accounts Components
A
- Profit and Loss Account: Shows income and expenses for trading year
- Balance Sheet: Snapshot of business assets and debts at year end
- Capital Account Details:
- Original capital (startup cash)
- Additional investments (extra cash into business)
- Profits from past years (retained earnings)
- Personal drawings (cash taken out by owner)
- Lenders examine these documents to assess business viability
- Drawings vs profit ratio particularly important for affordability assessment
8
Q
Company Directors Income Assessment (Capital Account)
A
- Directors with 20-25%+ ownership assessed as self-employed
- Can be treated as both employees and business owners
- Income includes salary plus dividends
- May “moonlight” as self-employed when advantageous
9
Q
MCOB 11 - Responsible Lending
A
- Rules ensuring lenders assess affordability properly
- Prevents borrowers from taking on unmanageable debt
- Requires income verification and expenditure assessment
- Includes stress testing for future rate increases
10
Q
Director’s Loan
A
- CREDIT: Money/assets coming INTO the company (company owes director)
- DEBIT: Money going OUT of the company (director owes company)
- Asset transfers during incorporation create a CREDIT
- Credits are favorable for tax-efficient fund withdrawals
- Credit putting INTO piggy bank - GOOD
- Debit taking out of piggy bank - BAD
11
Q
Exact Lender Checks
A
- Committed expenditure must be checked using exact figures
