What banks in Spain look at when studying your mortgage application
Are you planning to start your mortgage application process in Spain?
Do you want to understand what banks look at to consider you eligible for a mortgage?
Spanish banks follow a comprehensive underwriting procedure before they can offer you a mortgage. In this article, we will explore what factors banks take into account as part of the mortgage underwriting process in Spain.
Importance of mortgage underwriting
Mortgage underwriting is the process where lenders assess the creditworthiness of potential borrowers to determine their eligibility for a mortgage. Spanish banks perform a thorough evaluation to mitigate the risks associated with lending and ensure you can repay the loan. Let’s delve into the key elements Spanish banks consider when underwriting mortgage applications.
Debt-to-income ratio
The debt-to-income ratio (DTI) is a key metric that banks will look at when considering whether or not to offer you a mortgage.
Banks calculate this ratio by dividing your total monthly debt payments, including the Spanish mortgage you are applying for, by your net monthly income.
Lenders prefer a lower DTI as it demonstrates your financial stability and capacity to handle additional mortgage debt.
It’s key for banks to have a clear understanding of how your income is structured, as this is sometimes complex. A clear and well-documented explanation of your income will allow the bank to consider fixed income, variable incomes and real estate income, but the criteria used to consider each of these income sources varies from one lender to another.
Lenders have different criteria for the maximum DTI they will accept, but the usual maximum ratio banks will consider is between 20% and 35% depending on bank, currency of income, available income after debt repayments and other factors banks consider.
Tip: Pay off any existing debts to reduce your monthly obligations before applying for a mortgage to improve your DTI ratio.
Credit history
One of the factors that banks consider is your credit history. They review your credit report to assess your past borrowing behaviour, including the number of outstanding loans, credit card balances and timeliness of payments. Remember, a strong credit history significantly improves your chances of mortgage approval.
Although this is something banks in Spain look at, a low credit score sometimes is the result of a lack of credit history. If the score is low due to lack of history rather than delayed or pending payment history, banks will have no issue in considering you for a mortgage.
Tip: Maintain a healthy credit score by paying your bills on time, reducing outstanding debt and avoiding late payments.
Tax residence and currency of income
Banks look at client’s tax residency and currency of income. Banks will only consider clients with certain currencies of income for a mortgage. This is due to the currency exchange risk they see and the regulation that allows clients to change a mortgage back to the client’s main currency of income.
Also, tax residency will determine whether you are eligible for a resident or a non-resident mortgage. Even when living in Spain, if your income comes from abroad and you are not declaring income tax in Spain, the only option might be a non-resident mortgage.
Tip: Ask us about your currency of income to make sure we have a lender who can service your mortgage.
Financial stability
Spanish banks evaluate your financial stability, including your employment history, current level of income and job security. They assess the stability of your source of income to ensure that you can maintain regular mortgage payments throughout the term of the loan.
The amount of time you have been in your current employment or running your own business is key here, and sometimes recent job changes can be an issue for Spanish banks.
Another key factor of financial stability analysis is permanent residency, especially bearing in mind that most property purchases in Spain by non-residents are for second homes, holiday homes or investment properties. A borrower who is a permanent resident will always be seen in a better light by underwriters than a client living in a rented home or with family.
Tip: Provide proof of consistent income, such as payslips or tax returns, to demonstrate your financial stability.
Loan-to-value ratio
The loan-to-value (LTV) ratio is the proportion of the mortgage loan amount versus the appraised value of the property you intend to purchase. Banks in Spain prefer a lower LTV ratio as this reduces the risk associated with the mortgage loan. A higher down payment means a lower LTV ratio, but more savings required for the purchase.
Banks will consider a maximum LTV of 70% for non-resident mortgages and 80% for resident mortgages, although small exceptions and differences can be found dependent on banks, work situation, the value of the house, etc.
A lower LTV ratio increases your chances of mortgage approval.
Tip: Save to be able to make a significant down payment or consider offering additional collateral to reduce the LTV ratio.
Saving capacity
This metric is related to the loan-to-value ratio. Banks like to see that the buyer is putting a significant amount of savings into the property.
Considering the usual LTV ratio, clients need to come up with a minimum of 30% in savings if they are eligible for a resident mortgage and 40% in the case of non-resident finance. This is to cover the 20-30% not financed by the bank and the costs associated to the purchase. As a result, these figures can vary depending on the region of Spain where you are purchasing.
Banks will not consider clients whose funds to invest in the purchase clearly come from other finance (personal loans, or equity releases on properties in your home country for example). They like to see a borrower’s capacity to save over time as a measure of financial stability and capacity.
Clients with funds coming from family members, gifts, capital gains from sales or trading can be considered, but underwriters will score this negatively.
Tip: Show your ability to save. Organise your bank accounts to show this as clearly as possible with separate savings or investment accounts.
Property valuation and legal and administrative checks
In Spain, it is necessary to conduct legal and administrative checks once you have selected the property you want to purchase. Banks ensure that the property has proper legal documentation, including the necessary permits and titles. They also verify that there are no legal disputes or liens associated to the property.
Before the final documents are prepared to sign the mortgage, Spanish banks perform a property valuation to determine its market value. The valuation assesses the condition, location and demand of the property to ensure it aligns with the mortgage amount requested. A realistic property valuation is crucial for both the borrower and the lender.
Tip: Hire an experienced lawyer to assist you with the legal and administrative aspects of the property purchase and make sure your real estate agent or mortgage advisor help with the valuation process.
Summary
Obtaining a mortgage in Spain entails careful evaluation by banks of several key factors. By considering your credit history, debt-to-income ratio, financial stability, loan-to-value ratio, property valuation, and conducting legal checks, Spanish banks strive to offer viable mortgage options. Remember, maintaining a strong financial profile and understanding the mortgage underwriting process can significantly improve your chances of securing your dream home in Spain.
Got any questions about pre-approved mortgages?
Don’t hesitate to contact Hipoteken for a no-obligation chat with one of our experienced specialists.
You can call us direct on (0034) 960 599 967, email us at info@hipoteken.com or fill in the form on our Contact page.
