Does lender care about historic spending habits?

AshCash

We currently are in the process of selling our house and buying a new one. We are also in a significant amount of debt. The equity in our existing house is enough to wipe the debts out completely. The plan is to use the profit from the sale of the existing house to pay off the unsecured debt. We are porting our mortgage, but we are then applying to borrow more because the new house is more expensive.

Basically, we are transferring the debt from unsecured to secured. So (let's say) our current house is worth 100 quid and there is a 50 quid mortgage on it. We also have 40 quids worth of unsecured debt. So we are taking the equity, paying off the 40 quid unsecure debts, and then applying to borrow an additional 40 quid mortgage, bringing the total mortgage to 90 quid.

So we are resetting everything to zero. Hope I've made myself so far.

Our new mortgage (with our existing provider) has been accepted in principle, on the basis that we pay off the debt with the profit. They have asked for a proof from our solicitor that this will happen. So far, so good.

Now it's gone to the underwriters - and here is my question. Will an underwriter base his/her decision on previous spending habits (ie. the fact that we go into so much debt in the first place suggests that we are too high risk) or will they base their decision purely on current affordability and very good credit history (never missed a payment, will have very few outgoings after debt is cleared and our salaries easily meet affordability criteria and then some). I'm worried that the fact that we amassed debt in the past (to further our education, propelling ourselves from crap paid jobs to well paid jobs and fixing up a house to the extent that we could sell it for a figure that wipes out our debts) will be seen as a negative, even if it isn't officially counted in the 'income vs outgoings' box.

Thanks

Thrugelmir

Paying debts on time doesn't correlate to anything. As that's the base requirement of entering a credit agreement. Lenders have access to a myriad of data from the CRA's that will be analysed by computer algorithms. It's this that will be bench marked against internal lending criteria.

In more simplistic terms a lenders focus will be on your historic spending patterns, i.e. debt building over time. Alternatively could be be described as living beyond your means.

AshCash

So it's algorithms, not humans that underwrite mortgages? i.e: They won't give a !!!! that we went 10k into debt fixing up a house and then sold it for 70k more than we bought it for less than a year later? All they will see was that we went 10k into debt.

And they won't care that after three years of self funded education and training, we have quadrupled our salaries? All they will see is that we have lived beyond our means? Funny, algorithms and users on moneysavirngexpert often seem to share this cold trait!

Worst case scenario, we sell and don't buy and in a matter of months, we will be ideal candidates in the eyes of most mortgage providers. But we are in the middle of a fixed term deal and so are trying to stay with our current provider. It's in both our interests to ensure it goes through. We already owe them a couple of quid, and this transaction makes us less of a credit risk. But understanding that requires a human touch.

amnblog

AshCash wrote: »

So it's algorithms, not humans that underwrite mortgages? i.e: They won't give a !!!! that we went 10k into debt fixing up a house and then sold it for 70k more than we bought it for less than a year later? All they will see was that we went 10k into debt.

Why would they care? Lots of properties untouched go up in value. You are not applying for development funding.

And they won't care that after three years of self funded education and training, we have quadrupled our salaries? All they will see is that we have lived beyond our means? Funny, algorithms and users on moneysavirngexpert often seem to share this cold trait!

What difference does it make to the lender how you got where you are income wise? There are plenty of people making twice what you do with no education. Does that make them a worse risk?

Worst case scenario, we sell and don't buy and in a matter of months, we will be ideal candidates in the eyes of most mortgage providers. But we are in the middle of a fixed term deal and so are trying to stay with our current provider. It's in both our interests to ensure it goes through. We already owe them a couple of quid, and this transaction makes us less of a credit risk. But understanding that requires a human touch.

Mortgages are not underwritten on a 'human touch'. Facts make profit not compassion.

AshCash

amnblog wrote: »

Why would they care? Lots of properties untouched go up in value. You are not applying for development funding.

Exactly my point. For better or worse, our economy is based on a fractional reserve banking system. Banks operate and exist on a debt-based model. They need people like me to borrow 10K and if I find a way to pay it back, plus interest, whether it's through property development or selling lemonade, they shouldn't care what the loan was for. But they should look at the fact the I bought 10 lemons for a buck a piece and made 40 bucks selling lemonade.

What difference does it make to the lender how you got where you are income wise? There are plenty of people making twice what you do with no education. Does that make them a worse risk?

Why then, do most of the high street banks offer favourable graduate credit cards/current accounts/career development loans? They do it because they know that someone with a degree will earn - on average - 12K per year more than those without a degree - right off the bat.

I'm really not asking for a moral analysis on my personal circumstances, my income or my my education. Nor am I looking for support. People that have themselves overcome the burden of debt seem obliged to make others feel inferior. I'm asking for someone with first hand experience of the process of underwriting to help me understand how much of an impact previous debt levels will have, given that they have based affordability on those debts not existing (their suggestion, not mine).

PS. Forgive me... I just saw that you are a mortgage broker. So if you were my mortgage broker, and I came to you with significant debt that I wanted to pay off with the equity in my house, and to take out a larger mortgage, your advice would be... don't bother, based on the fact that I was in debt prior to the sale?

AshCash

AND... if they don't take any of the information into consideration and just hand it over to their analysis engine, why do they spend three hours asking questions like: How was the debt accumulated, and will you borrow to develop the next property? Those are human questions. Is it all just for show, in order to meet regulatory requirements?

amnblog

AshCash wrote: »

AND... if they don't take any of the information into consideration and just hand it over to their analysis engine, why do they spend three hours asking questions like: How was the debt accumulated, and will you borrow to develop the next property?

Cos the people at the Regulator think it's a good idea.

Thrugelmir

AshCash wrote: »

They won't give a !!!! that we went 10k into debt fixing up a house and then sold it for 70k more than we bought it for less than a year later?

Actually they won't. As there's no certainty that the money spent on improvements actually added any value. Might be the local market that's moved upwards.