Every bank checks the creditworthiness of the loan applicant before approving the mortgage. Creditworthiness means the ability to meet the obligations to the bank, i.e. to repay the loan properly and on time. To determine creditworthiness, the bank uses scoring to determine the riskiness of a particular client. Banks consult banking and non-banking registers, assess the overall parameters of the application (e.g. the age of the applicant, the amount and source of income) and check the accuracy of the personal data of all mortgage applicants. If everything is in order, they can proceed with the mortgage approval. The mortgage specialist will ask for all necessary documents (e.g. income certificate, purchase contract, property appraisal, etc.).
TIP: Are you considering a mortgage and want to know your monthly payment? Calculate it in our online mortgage calculator hyponamiru.cz
When assessing a mortgage application, the bank will be interested in
- Records in banking and non-banking registers (BRKI, NRKI, Solus)
- Applicant’s income and expenditure, including loan repayments
- Source of income
- Age of the mortgage applicant
- Highest level of education attained
- Marital status including number of children raised
Banks are not act uniformly in their assessment of a mortgage applicant’s creditworthiness. This is also why you may be successful in one bank with your mortgage application while being rejected by another.
Income versus debt ratio
When processing a mortgage application, banks are interested in the amount and source of income, as well as the amount of current expenses and repayments on any loans or borrowings. Based on the Czech National Bank’s recommendation, mortgage providers compare the amount of total debt (i.e. all loans including the mortgage) with the amount of the applicant’s net annual income (DTI). The value of the DTI should not exceed 9. Based on this indicator, the bank will determine whether the mortgage payment will not burden you too much. Banks must also take into account the DSTI (the ratio between the total amount of all monthly loan repayments and the net monthly income of the loan applicant), which will show whether you can manage to repay the mortgage without problems. According to the CNB’s recommendation, this ratio should not exceed 45%.
TIP: You can calculate the DTI and DSTI values online on the Czech National Bank’s website.
How to increase your credit rating
Mortgage applicants with good credit ratings usually have no problem getting a mortgage. In addition, the bank may give them a better interest rate. On the other hand, people with lower incomes, for example, who are paying off a consumer or other loan at the time of applying for a mortgage, are in a worse position. Banks also treat the income of an employee and a self-employed person differently. If your bank rejects your mortgage application, you may be interested in finding out how to improve your creditworthiness. The solution to this situation will depend on the specific reason for the rejection.
Hyponamiru.cz mortgage specialists are familiar with the offers of individual banks and will be happy to advise you on how to improve your creditworthiness. Some of the lesser-known tips for improving your credit rating are shown below.
Repayment of consumer credit by mortgage
A relatively common obstacle to obtaining the required mortgage amount is the repayment of various loans and credits. There are two banks on the Czech market (Hypoteční banka and UniCredit Bank) that can directly repay consumer loans to clients. Other banks do not offer this option and count the consumer loan as a liability. Consequently, the DTI and DSTI come out worse with lower net income. Paying off a consumer loan with a mortgage will increase your creditworthiness.
Pre-approved mortgage for entrepreneurs
Some entrepreneurs have high turnovers in their bank accounts and maintain a stable financial reserve of less than a hundred thousand crowns. ČSOB is the only bank in the Czech Republic where entrepreneurs can obtain a pre-approved mortgage based on account movements. After half a year, the bank generates the pre-approved payment and also determines the maximum possible mortgage amount. If the entrepreneur passes the bank’s scoring, it no longer requires proof of income. Therefore, entrepreneurs whose tax returns do not show a high enough income can get a mortgage. The pre-approved mortgage limit is up to CZK 7 million.
Bonuses can improve creditworthiness
One-off rewards at work can also increase a mortgage applicant’s creditworthiness. However, you need to choose the right bank that will be able to provide proof of income for less than 12 months. For example, Raiffeisenbank counts a 6-month average in the income confirmation. Some banks also count an average of 3 months. Hypoteční banka also has an interesting approach. If the difference between the average for 3 and 12 months does not exceed 20%, then the higher of the confirmed averages can be counted. A one-off reward included in the average for a shorter period increases the average income and thus the creditworthiness of the mortgage applicant.
People who receive regular income from renting their own home can also improve their bonus. Again, however, you need to choose the right bank, as each bank recognises and counts a different amount of income. For example, mBank and Česká spořitelna count up to 70% of the net rent excluding utility payments. However, you need to show proof of ownership of the property and three bank statements with the rent credited. The bank recognises this income even without submitting a tax return.