When you’re applying for a mortgage, you might feel like the lender needs to know every little detail about your life. This is especially the case when it comes to your income, as the lender needs to ensure that you will be able to afford the repayments.
But how do mortgage companies verify income in the UK?
There are a few different ways in which a mortgage company will verify your income, including payslips, P60s, bank statements, tax returns and a letter from your employer.
In this article, we’ll take you through each of these methods in more detail, as well as exploring some of the most commonly asked questions about how lenders calculate your mortgage affordability.
How Do Mortgage Lenders Check Your Income?
There are five key ways in which a lender might ask you to prove your income for a mortgage. These are:
- Bank statements
- Tax returns
- Letter from employer
Let’s take a look at each of these in more detail.
The first way that a mortgage lender might verify your income is by looking at your payslips. Lenders will usually require at least three months’ worth of payslips in order to get an accurate picture of your earnings.
Another way that mortgage companies verify income is by asking for your P60 form. This is a document that is issued by your employer at the end of the tax year and it shows your total income for that year. You should receive your P60 in May each year. If you haven’t received your P60, you should ask your employer for the document.
Mortgage companies can also ask for bank statements in order to verify your income. Not only will this allow them to see your salary entering your account, but they’ll also be able to see how you spend your money to check that you can afford your new mortgage. This is usually only done if you are self-employed or have irregular income, as it can be more difficult to prove earnings in these cases.
If you are self-employed, then a mortgage lender will need to see your tax returns in order to verify your income. This is because your earnings as a self-employed person are not always guaranteed, and so the lender needs to be sure that you will be able to afford the repayments even if your income fluctuates.
Letter from Employer
If you have recently been offered a new job or had a change in salary, the lender may ask for a letter from your employer, or to see your contract of employment. This is to verify that you will be earning the amount of money that you have stated on your mortgage application.
How do Mortgage Companies Calculate Income?
Now that we’ve looked at some of the ways in which a mortgage company can verify your income, let’s take a look at how they calculate your income for a mortgage.
The first thing that a lender will do is take your gross annual income and divide it by the number of months in the year. This will give them your monthly income figure.
From here, the lender will then deduct any regular outgoing payments that you have, such as debts, child maintenance or alimony payments. This leaves them with your disposable income figure, which is the amount of money that you have left each month after your essential outgoings have been paid.
The lender will then use your disposable income figure to calculate how much you can afford to repay each month on a mortgage. They will also take into account any other financial commitments that you have, such as dependents and credit agreements in order to calculate a realistic figure.
Once the lender has calculated how much you can afford to repay each month, they will then use this figure to calculate how much you can borrow.
This is usually done by multiplying your monthly repayments by the number of months in the mortgage term. For example, if you have a repayment term of 25 years and you can afford to repay £500 per month, the lender will calculate that you can borrow £500 x 12 x 25, which equals £150,000.
The final step in the process is for the lender to check that you can actually afford the mortgage repayments. They will do this by looking at your spending habits and making sure that you have enough left over each month after your mortgage repayments to cover essential outgoings, such as food and utility bills.
If the lender is satisfied that you can afford the repayments, then they will offer you a mortgage.
Do Mortgage Lenders Check Income With HMRC?
Mortgage lenders will not usually check your income with HMRC, as this is something that you are required to do yourself when you complete a Self-Assessment tax return.
However, if you are self-employed or have irregular income, the lender may ask to see your tax returns in order to verify your earnings.
How Often Do Mortgage Companies Check Income?
Mortgage companies will usually only check your income when you first apply for a mortgage.
However, if your circumstances change during the course of your mortgage, such as if you change jobs or have a significant change in income, the lender may ask to see updated documentation to verify that you are still able to afford the repayments.
What Happens if My Income Decreases During the Mortgage Term?
If your income decreases during the mortgage term, you should contact your lender as soon as possible. They may be able to offer you a repayment holiday or extend the term of your mortgage, which will reduce your monthly repayments.
If you are struggling to afford your mortgage repayments, there is also the option of remortgaging to a mortgage with a lower interest rate. This will reduce your monthly repayments and make them more affordable.
How Do I Prove My Income If I Am Self Employed?
If you are self-employed, the best way to prove your income is to provide the lender with your latest tax return. This will show them your earnings for the previous year and give them an idea of how much you are likely to earn in the current year.
If you are new to self-employment, or if your earnings fluctuate from month to month, the lender may ask to see your bank statements for the last six months. This will enable them to see how much money you have been paid into your account and give them an idea of your average monthly earnings.
Can You Lie About Income For Mortgage?
No, you should not lie about your income when applying for a mortgage.
If you do not disclose all of your income and the lender later discovers that you have lied, they may refuse to offer you a mortgage or they may ask you to repay the loan in full.
In some cases, you may also be liable for criminal charges for fraud.
How Much Income Do You Need For A Mortgage?
The amount of income you need for a mortgage will depend on a number of factors, such as the amount you want to borrow, the deposit you have available, your monthly outgoings, the term of the mortgage and the interest rate.
If you are unsure how much income you need for a mortgage, you should speak to a mortgage advisor who will be able to assess your circumstances and provide you with tailored advice.
Do Mortgage Lenders Call Your Employer UK?
Mortgage lenders will not usually call your employer to verify your income.
However, they may contact your employer to request a reference or to confirm your employment status.
If you are self-employed, the lender may ask to see evidence of your earnings, such as your latest tax return.
Do Mortgage Lenders Check All Bank Accounts UK?
Mortgage lenders will not usually check all of your bank accounts when you apply for a mortgage.
However, they may request to see your bank statements in order to assess your financial situation and verify your income and your outgoings.
If you have multiple bank accounts, the lender will usually just request to see the account that your salary is paid into. However, some lenders may ask to see all of your bank accounts to verify your outgoings and ensure that you can afford your mortgage.
How Can I Get A Mortgage Without Proof Of Income UK?
Most lenders will require proof of income before they will give you a mortgage. This is because they need to ensure that you can afford your mortgage repayments before they will agree to lend you the funds. You can provide proof of income with payslips, a P60, bank statements, a letter from your employer or a self assessment tax return.
Do Mortgage Companies Verify Your Tax Returns?
Mortgage companies will not usually verify your tax returns. However, if you are self-employed, the lender may ask to see your latest self assessment tax return and your HMRC tax summary in order to assess your earnings and ensure that you can afford your mortgage repayments.
How Do Mortgage Companies Verify Employment?
Mortgage companies will usually verify employment by asking for your most recent payslip or P60. They may also contact your employer directly to confirm your employment status and income, or ask for a copy of your contract of employment.
Why Is My Lender Asking For My P60?
Your lender may ask for your P60 in order to verify your income and ensure that you can afford your mortgage repayments.
Your P60 is a document that shows your taxable earnings for the previous tax year, as well as any tax that has been deducted from your pay.
If you do not have a P60, you can ask your employer for a copy.
Mortgage companies will require proof of income in order to assess whether you can afford your mortgage repayments. This can be in the form of payslips, a P60, bank statements, tax returns or a letter from your employer.
In this article, we have answered the question ‘how do mortgage companies verify income in the UK?’, as well as exploring mortgage affordability in more detail.