A mortgage capacity report is a document that lenders use to assess the ability of a borrower to repay a mortgage loan when they buy a house. This report includes information such as the borrower’s income, debts, and credit history, as well as the property being purchased.
Lenders use this information to determine the borrower’s debt-to-income ratio and credit score, which are important factors in the loan approval process.
In this article, we will discuss the importance of mortgage capacity reports, what information they contain, and how they are used in the loan approval process. We will also provide tips for borrowers on how to improve their mortgage capacity report to increase their chances of loan approval.
What is a mortgage capacity report?
A mortgage capacity report shows how much a mortgage applicant is able to borrow. It is different to other documents like a mortgage in principle for example because a mortgage in principle is issued individually by a lender.
On the other hand, a mortgage capacity report provides a compilation of all the lenders that would likely approve you mortgage application with how much loan you’ll be eligible for and it is issued by a mortgage broker.
This means it is more thorough than an agreement in principle (AiP), however, it is not as reliable as a mortgage capacity report is still just an estimate based on what banks have lent in the past.
In order to take away a reliable figure that you can use to make offers on a property, go to the bank and ask for an agreement in principle as this will come straight from the lender.
This provides concrete evidence they will lend you the money given the rest of your credit check is ok.
What information should be given in a mortgage capacity assessment?
Mortgage capacity reports should involve you giving the mortgage broker conducting the report the information necessary to generate an accurate document.
This includes the value of any property you own and a few other details you can find below. In general, they are all able to be found with a small amount of research on your behalf as a buyer.
The amount of mortgage you have borrowed
It is vital you understand the amount of money left over from any mortgage that is in a residential property or an investment property such as in a buy to let mortgage.
You can find this out by calling most mortgage providers or logging in inline to view the status of your mortgage.
The details of the investment
The details of your investment is crucial when generating a capacity report. You’d want to provide as much detail as you can about the finances of any property investment you have in place already.
The details of your earned income
Earned income is also a factor that lenders look at. A mortgage broker will more than likely look at all the earned income that you will take home in a tax year.
This gives them an excellent overview of any potential scenarios that could occur if you were to lose some of your income or potentially increase some income too. Divorce is also considered in this stage.
In this step, the total of the amount of pension and the current value of your pension should be given. This is because there is a chance there is a separation case when you default on mortgage payments and your pension could be at risk.
A solicitor can give you further advice on this and they will also be able to go over some of the harder to understand laws like section 24 too or if you’d need a mortgage guarantor.
Information to agree on terms with the mortgage broker
Finally, you’d also need to give some information about the agreed split you’d like to have with the mortgage broker. As they’d be arranging your house’s mortgage and setting everything up, they take a fee.
Sometimes this is a fee that is upfront and other times it is set up with the lender so the mortgage broker makes money through the lender – indirectly from your own mortgage payments.
Either way, it is crucial you fully understand how the mortgage broker will get paid before a mortgage capacity report is produced and you should give the relevant information to do so.
What should you do if you need a mortgage capacity report?
If a mortgage capacity report is needed, the first thing you should do is speak to a mortgage broker. However, there are also some articles on the Lofti website where you can find out more about mortgages and gain a better understanding.
For example, check out our article on how to get a mortgage without payslips if you aren’t sure that you have enough equity available in your loan to pay for the house you truly want.
Also, consider going ro a 95% mortgage which allows a first time buyer to gain approval for a mortgage with just a 5% deposit. This is an excellent way of getting on the housing ladder for the first time but it still comes with its own pros and cons.
Who conducts a mortgage capacity report?
A mortgage capacity report is conducted by a mortgage broker or a mortgage advisor. You should be able to find one by going online or by using a physical company.
They could work as a team or an individual and will usually have access to multiple lenders and contacts in banks to be able to do soft credit checks on behalf of their clients.
A mortgage broker essentially acts as a middle man between the mortgage applicant and the banks or lender. However, mortgage capacity reports can also be used for other reasons other than mortgage applications.
For instance, find below a list of reasons why it is necessary to have a mortgage advisor conducting a mortgage capacity report.
Why is it necessary to have an independent mortgage advisor?
Independent mortgage advisors are useful as they are more likely to give a more general overview of your mortgage options and finances that aren’t based around one company.
For example, a mortgage advisor who is working for a particular bank or lender may be biassed to give particular advice that places their company favourably.
On the other hand, an advisor who works independently is more likely to give a better general overview of lending.
Why is a mortgage capacity report necessary?
It is clear that there are situations where a mortgage capacity report isn’t essential. So, why have a mortgage capacity report in the first place?
Well, there are some other important reasons for conducting a mortgage capacity report that you may not have heard of below.
Appear more legitimate to legal professionals
Mortgage capacity reports are also necessary to make an applicant be able to present an accurate assessment of their financial status. Capacity reports are so reliable that they are often used in court.
Because a mortgage broker is able to really delve into someone’s financial history, it is likely the report is accurate so for this reason, the document can be used outside of traditional mortgage applications.
Explains everything concisely and predictably
If you are considering potential scenarios and attempting to plan for the future. It is wise to conduct a mortgage capacity report because it represents your personal finances in an easy to read format.
With this format you can then make better predictions for the future if you are doing things like trying to improve your credit score for the future or trying to work out the taxes you have to pay due to section 24.
Saves money during divorce
Mortgage capacity reports, while used in general to create an assessment of what an applicant for a mortgage is eligible for, can also be used during divorce or separations.
As assets are transferred, a capacity report is also conducted at the request of a solicitor typically in order to protect a client’s assets during divorce.
For example, if two people divorced and there was a mortgage left on a property that they were both in the process of paying off then a capacity report can be used to show what each person owes.
To conclude, a mortgage capacity report is a vital document for those who need a professional document that stands up in court and is able to be used to make predictions about their personal finances for the future.
Especially as an individual gains a lot of debt for mortgages, it can be a beneficiary way to make sure everything is in order. Making it a document perfect for giving to further professionals like accountants and solicitors to conduct assessments.