Mortgage Lending Process, Affordability and Underwriting
The lending journey
A regulated sale runs: fact find, affordability assessment, ESIS, decision in principle (an indication, not an offer), full application, valuation, underwriting, mortgage offer, exchange and completion. Underwriters verify identity and address (AML/KYC), income (payslips, bank statements, SA302s and accounts for the self-employed), deposit source and credit history, then check the property against the lender's security requirements.
Affordability
MCOB 11 requires a creditworthiness assessment that is not based solely on LTV. Lenders assess income and committed expenditure, apply stress tests (commonly the higher of the reversion rate and the product rate plus a margin) and must keep loans at or above 4.5 times income within 15% of their new mortgage flow. Interest-only cases need evidence of a credible repayment vehicle. Buy-to-let underwriting uses rental cover - often 125% of stressed interest at 5.5% or product rate plus 2%, and 145% for higher-rate taxpayers.
Traps
A DIP is not a guarantee and full underwriting can still decline. Bonuses and overtime are usually averaged and haircut. Childcare, school fees, credit commitments and pension contributions must be captured; undisclosed debts found at the credit search derail applications. The valuation protects the lender, not the borrower.
Worked example
Rental cover: £900 pcm rent on a £200,000 loan. At a 5.5% stress rate monthly interest is £916.67; 125% cover needs £1,146, so the case fails. The maximum loan becomes roughly £157,000 - the cover ratio, not the rent alone, sets the loan size.