Understanding Mortgage Loan Approval in Czech Republic

In order for the bank to find out how far the client’s creditworthiness is, or will continue to be in the future, and the amount and regularity of the installments will not be a problem for him, he is primarily interested in his income, or the income of the entire household as well as household expenses, including other obligations. Last but not least, the client’s current payment behavior is also subject to investigation. The profession played, whether the applicant is employed or running a business, also plays a role in the assessment, as well as marital status and the number of supported children and, of course, age, etc.

“Each bank evaluates mortgage applicants according to its own methodology. It often happens that while you fail to apply for a mortgage loan with one bank, you get a home loan without any problems with another. Thorough knowledge of the methodologies of individual banks is therefore key when choosing a mortgage,” added Miroslav Majer from the start-up hyponamíru.cz.

Banks providing mortgages are obliged to follow the rules of the Czech National Bank, which set the limits of the so-called credit indicators. These are LTV (Loan to Value), or the ratio of the amount of the loan to the value of the collateral, then DTI (Debt to Income) and DSTI (Debt Service to Income), which relate to the ratio of the applicant’s debt load and the amount of his income. All rules must be met for mortgage approval.

“The DTI indicator is intended to prevent overindebtedness of a mortgage applicant. It expresses the ratio between the amount of your total debt and the amount of net annual income. For mortgage applicants under the age of 36, the upper limit of this indicator is 9.5, and for older people it is 8.5,” explained Majer.

“Using the DSTI indicator, the bank verifies whether you can repay the loan. This indicator expresses the percentage of the total amount of monthly loan repayments (note mortgage and other loans) on your net monthly income. For mortgage applicants under the age of 36, the upper limit of this indicator is 50 percent, and for older ones, 45 percent,” added Majer.

When assessing an application, banks are not only interested in the amount of income of the person interested in a mortgage, but also where the income comes from.

The main sources of income are primarily income from employment or business. For employees, they are confirmed on a bank form by their employer, self-employed persons prove their income through tax returns, usually for the last two years.

Secondary income includes rewards resulting from agreements on the performance of work or work activities or perhaps from part-time jobs. However, banks usually do not accept these incomes, given that they are mostly short-term and unstable incomes. Some mortgage applicants may also have income from renting so-called investment properties. The bank assesses these incomes on the basis of the lease or future lease agreement. However, the condition for their recognition is that they are included in the tax return.

Some banks may also consider other types of income. For example, most banks accept parental allowance, maternity allowance, alimony awarded by the court, service allowance or disability, old-age or widow’s pension.

However, some incomes are not recognized by the banks, such as unemployment support, living allowance, housing allowance, one-off child allowance, maternity allowance, funeral allowance, allowance for the payment of the child’s needs, sickness benefits, benefits for disabled persons, nursing or orphan’s allowance pension.