Underwriting issues for European mortgages
Simon Conn is an overseas property and finance specialist.
Despite the tricky financial climate we live in, scores of Brits are still taking the plunge and either emigrating, or buying a second home abroad. However, if you wish to raise a mortgage to purchase your overseas property there are many different underwriting obstacles you may come up against.
Once you have seen the property, enlist the services of an independent lawyer. Before any contract is signed, it must be “subject to mortgage finance” and this provides a fall-back position, such as:
• if you fail financially;
• if the property is down valued;
• if there are legal issues – or other problems – that may occur which may not allow you to complete (for example losing your job, family illness etc).
By applying for a mortgage, the added advantages are that the bank will also check the legalities and carry out a valuation on the property, although they will not carry out a full in-depth survey unless requested. The banks will only ensure the property is good security for the mortgage that you require and to check the property has not been overpriced.
Please note that by applying for a mortgage, it could slow down the sales process and there may be additional bank, local taxes and legal costs.
The bank calculates how much an applicant can afford by normally only taking into account 30-33% of their total net personal income (after tax), to cover any existing liabilities (such as existing mortgages, bank and car loans, school fees, maintenance/alimony payments etc), plus the cost of the new monthly mortgage repayments.
Net income is normally calculated from employed, pension or, possibly, investment income. In most instances no rental income on the new property will be taken into account.
If an applicant has existing rentals, lenders may also not take that income into account. However if that rental income is from multiple properties and separate audited accounts are available, the net profit could be taken into account. They may also request a tax return to substantiate this additional income.
A lower loan-to-value or a higher deposit may not affect the maximum amount you can borrow, as since the world economic crisis, it is primarily down to affordability.
If you are employed, it is ideal if you have been employed in your current job for at least six to 12 months. If it is shorter, a potential lender will need to know of any remaining probationary period, and you are also likely to be asked for your latest CV showing your job experience.
If there is a bonus, overtime or commission to be included, it is only likely to be included if it is guaranteed, or possibly if there is a long-term track record.
If you are self-employed, you will ideally have at least three years’ trading history with a minimum of two years’ profitable accounts (confirming both gross turnover and net profit for those years). There must be a full explanation for any drop in turnover/profit and, of course, any losses incurred.
Please note, if an applicant has more than 20-25% shareholding, then they are normally deemed by a potential lender to be self-employed.
If the self-employed applicant is based outside of the UK, their accounts must be ideally prepared by a recognised international firm of Accountants to be accepted by a potential lender.
Other commitments which need to be taken into account are bank loans, car loans and leases, school fees, maintenance and alimony payments and credit card balances, which need to be cleared even if it is a 0% interest deal.
However, if a loan or other expense is paid for by a business, then any of these costs may not affect a personal mortgage application. In this case, you must show at least 3-6 months’ history of the business account paying these expenses, but if you have any defaults, missed payments or CCJs, you are unlikely to be accepted.
Pension and investment incomes may also be considered on a case-by-case basis.
The maximum age a mortgage can finish differs from country to country, and this ranges from age 65 to 75. However, the majority of lenders will ask for proof of income after the normal state retirement age.