Dear delia

Dear Delia Ian and Lesley are looking to buy their first home in London for up to 240,000. They have saved a 5% deposit. They realise their options may be limited due to their credit record - one rental arrears 10 months ago and one CCJ incurred six months ago. Ian earns 32,000 and Lesley 24,000. Ian is paying off a car loan at 250 a month, while Lesley\'s outstanding credit card balance is 4,000. What are their options?

Delia says: Borrowers in these circumstances need to be flexible. Here to help are Rob Clifford of mortgageforce and David Connolly of GE Money Home Lending.
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Intermediary ResponseRob Clifford is chief executive of mortgageforce

Thanks to extensive facilities in today’s mortgage market, their adverse history is not a show-stopper. The main challenge is likely to be affordability.

The required 95% mortgage will be a loan size of 228,000. The clients’ joint income of 56,000 needs to take account of their loan and credit card commitments of 4,400 a year. The residual income that most lenders would then use for affordability calculations would be 51,600, which results in a required income multiple of some 4.4 x joint income.

Given this high 95% LTV and taking into account the CCJ, rental arrears and the expectation of a generous income multiple, the clients may face limited lender choice. One that would look positively at them would be First National. The lender has a broad range of products, either with or without extended early repayment charges. The higher lending charge could be added to the loan in normal circumstances, and the mortgage could be taken on an interest-only or capital and interest repayment basis. Typical products available are a one-year discount at 5.59%, a two-year discount starting at 6.09%, a two-year fixed at 6.39%, or a three-year fixed at 6.59%. All have three-year early redemption charges.

If the clients happen to be a doctor, dentist, solicitor, barrister, accountant or vet, Accord Mortgages might consider their applicationunder the provisions of its mortgage scheme for professionals. Accord is likely to accept the CCJ and rent arrears. It currently offers a stepped discounted rate priced at 4.60% in year one, 5.50% in year two and 5.90% in year three, with no tie-in after that time.

Ian and Lesley should take great care to assess their own future affordability. They should pay particular attention to their likely monthly costs at the end of the initial product period, assuming their loan will revert to a standard variable rate deal. Only the clients truly know whether increased payments could be met from their disposable income. They need to bear in mind that many lenders would not be prepared to offer high income multiples and LTV requirements.

In this particular case, the clients can work hard to clear the credit card liability and, dependent upon the duration and end date of the car loan, the required income multiples may be within normal boundaries. Many lenders would be able to offer remortgage facilities in two years’ time.

Lender ResponseDavid Connolly is head of new product development at GE Money Home Lending

There are two main issues to consider in this particular case. First, based on their joint income, even with the 5% deposit, the sum of 228,000they want to borrowis beyond the reach of most traditional income multiples.

Second, they haveexperienced a couple of minor credit blips in the last 12 months, meaning their credit history is not perfect. This means that most prime lenders will beunable to help with this case. But there are still a number of other options open to Ian and Lesley.

Given their circumstances, their next port of call should be to a lenderthat can offer near-prime or light-adverseproducts to first-time buyers.

There are a number of lenders that can provide specialist lending solutions for borrowers who have experienced credit problems in the past. Companies such as First Nationalwould be able to help in this case.

First National can offer a loan of up to 95% LTV and will assess the maximum loan size based on the customer’s affordability rather than the more traditional, rigid income multiples. By using a debt-to-income ratio process, itcan be much more flexible when assessing the maximum loan size.

For example, joint incomes,outstandingcredit commitments, mortgage term, contributions to investment vehicles (for interest-only loans) andmortgage payments are all taken into account.

Once thoroughly verified, and assuming a mortgage term of 25 years andthat the couple have no other credit commitments, First National would be able to advance the required amount and resolve Ian and Lesley’s dilemma.

It is precisely for these particular cases that First National has recognised the individual needs of first- time buyers in the sub-prime market. In response, it has designed a bespoke product to meet these requirements.

To date, no other sub-prime lender offers a separate first-time buyer product. By approaching a specialist lender for an affordability-based assessment, Ian and Lesley are able to have the same income but achieve a different outcome than if they had approached a mainstream lender.

In such a highly competitive environment, where first-time buyers increasingly are being priced out of the market, it is vital that these type of flexible options are available. In providing these products, First National is able to help more and more customers, particularly first-time buyers, to obtain loans that would otherwise be unavailable to them.