When you’re thinking about buying a home, your income is a crucial factor to keep in mind. Your wages are especially critical since they determine what type of mortgage you can apply for and ultimately afford.
So, in this article, we’ll take a closer look at how wages influence mortgage applications and what you need to keep in mind before putting in an offer on a home.
It is useful to note that this does not include buy to let mortgages, only mortgages as buy to let mortgages aren’t influenced by your personal income but rather the income that will be able to be produced by the property if it were to be rented on the market.
What is a Mortgage?
As you prepare and think of buying a home and need to finance it, a mortgage is a type of loan that can help you do that without having to pay the whole value of the house up front.
When you take out a mortgage, you’re borrowing money from a lender that you’ll need to pay back with interest over a specific period. Your credit score, down payment, and income are all factors that determine the amount you can borrow and the interest rate you’ll be charged.
How do the wages you make affect mortgage applications?
When you apply for a mortgage, your lender will assess your ability to repay the loan based on your income. They will look at your monthly earnings, as well as any other debts or financial obligations you have, to determine how much you can afford to borrow.
This is done using a debt-to-income ratio (DTI), which is calculated by dividing your total monthly debt payments by your gross monthly income. Form there, the lender will perform a stress test where they weigh up whether there is the right amount of income to qualify an applicant for the debt.
Most lenders require that your DTI ratio be no higher than 43% and most lenders. In the case of an investment property, most lenders will also require you to have an income on the property that is over the mortgage repayments by an amount that is usually 120%.
However, some may accept a higher ratio or a lower stress test percentage under certain circumstances. For example, if you have a high credit score and a substantial down payment, you may be able to qualify for a higher DTI ratio.
The amount you can borrow also depends on your income level. Typically, lenders will approve mortgages for borrowers whose monthly mortgage payment (including principal, interest, taxes, and insurance) does not exceed 28% of their gross monthly income. However, again, this figure can vary depending on the lender and the type of mortgage you are applying for.
What are the different types of mortgages?
There are several types of mortgages available, each with its own requirements and terms. The most common type of mortgage is a conventional residential mortgage but there are also mortgages such as buy to let mortgages.
Fixed-rate mortgages are those that have a set interest rate for a specific period, usually between two and five years. This means that your monthly payments will remain the same throughout the fixed-rate period, regardless of any changes to the Bank of England base rate.
A tracker mortgage is usually a type of buy to let mortgage and is what happens to a mortgage after a fixed term. This type of mortgage has an interest rate that is linked to the Bank of England base rate, with a set percentage added on top. This means that your mortgage payments will increase or decrease in line with changes to the base rate and are very much out of your control.
An interest-only mortgage is a type of mortgage where the interest on the mortgage is paid off instead of the equity. The equity doesn’t have to be paid off until the fixed term is over.
This means that your monthly payments will be lower, but you will need to have a plan in place to repay the loan at the end of the mortgage term.
A Buy-to-let mortgage is specifically designed for people who want to buy a property to rent out. The interest rates on buy-to-let mortgages are usually higher than on residential mortgages, and the deposit required is typically larger. However, it has the added benefit of a buyer being able to purchase a property without living in it.
Choosing the Right Mortgage
When choosing a mortgage, it’s essential to consider your income level and financial situation carefully. You should aim to borrow only what you can comfortably afford to repay, and you should avoid taking on more debt than you can handle.
To determine the right mortgage for you, start by researching your options and comparing interest rates, fees, and terms. Be sure to read the fine print and ask questions if you’re unsure about any of the details.
