There are three key stages to the process of applying for a mortgage. You need to know the maximum amount that you can apply for, whether the lender will approve your application, and what additional things you will need to supply to conclude the mortgage.

1. How lenders determine how much you can apply for.
Lenders typically apply an Income Multiplier calculation. A basic example would be where they might allow applicants to have three times their salary. e.g. If I have a salary of $60,000, I would be allowed to apply for a mortgage of $120,000. The multiplier that they apply may vary from lender to lender, and depends upon the amount of risk that the lender is prepared to countenance. Obviously, lending someone six times their salary is much more risky than lending them three times their salary.

Most lenders will have a mortgage calculator on their website that you can use to work out the maximum that you can apply for. Or alternatively, you could phone or visit the lender to obtain the same information.

2. How lenders determine whether to accept your application.
Lenders use a process called Credit Scoring to decide whether to accept your mortgage application. They ask for various bits of information as part of the application process, such as income, address, existing bank account details, etc. Once you've submitted your mortgage application, the lender's IT system evaluates the information you've provided and attaches scores against some of those bits of information. If you exceed the pass mark, you will be granted an 'Approval in Principle' which means they are prepared to offer you to mortgage, subject to certain conditions such as being able to prove your identity.

Credit scoring may also be used to determine what interest rate you are offered. Some lenders use a pricing mechanism called Risk-Based Pricing, whereby they offer the best rates to people that they deem to be the lowest risk

Note: Omission of information can be harmful to your chances of passing the credit score. For example, if you say that you have no existing credit cards and they have access to records that show that you do, then this will count against you. It pays, therefore, to be truthful when completing your application.

3. How lenders determine that the mortgage offer can be finalized.
Having offered you an Approval in Principle decision, the final stage is for the lender to prove that you are who you say you are. This is a statutory requirement and a task that has become all the more important in the post September 11th fight against terrorism. The lender will normally do a check against the electoral register, but additionally they may ask you to supply documentation for validation such as passport, driving license, bank statements, etc.

Lenders generally are very keen to lend to people (it's how they make their money), so the process of enquiring about a mortgage shouldn't be too scary. Remember though that it's also important that you are comfortable that you can make the payments and that you've built in sufficient contingency to deal with possible future interest rate increases.

Learn more about this author, Simon Wright.
Click here to send this author comments or questions.

---

Add your voice

Know something about How lenders determine whether you qualify for a mortgage?
We want to hear your view. Write now!