No one likes being turned down for anything, especially a Mortgage to buy your dream home!
In the UK we all like to own our own castle so to speak and be able to create a living space we are proud off. The last 4/5 years have proved difficult for many of us to either buy our first home or move home and many people have had to make some tough decisions. There is no magic wand although we can make it easier by planning well.
I use the 6 p’s when working with clients - prior planning and preparation prevents poor performance, making sure you have the best chance to achieve the future you wish for.
Before you make an offer on a property, have your house in order. Preparing for a mortgage starts early so make sure your documentation is in order.
I will show you;
- What Lenders like to see in terms of documentation such as to evidence your income and outgoings.
- How much you can borrow using a whole of market sourcing system.
- How much deposit you will need and best strategy to purchase your property.
- Source a market leading product that meets your personal circumstances.
- How you can sit in the comfort of your own home and let me do all the work for you.
Lenders look for:
- Your last three years’ address history, with no gaps.
- I.D Passport, driving licence, bank statement or utility bill showing your address.
- Your last three months payslips and last P60 if employed or three years’ accounts if self employed. Lenders are now asking for Inland Revenue SA 302’s for self employed customers also in many cases. It’s simple to arrange and a call to HMRC will enable one to be posted to you, however, it does take a few days so worth planning ahead otherwise you will encounter delays in obtaining a mortgage offer from a lender.
- Your last three months bank statements.
- Full details of any loans or credit cards you have.
- An affordability calculation – write down your income, expenses and what money you have left on a monthly basis after costs.
Providing this information on day one can make the process easier for you and speed up the process no end.
All lenders want to make sure they are lending money to someone who is highly likely to pay it back so put yourself in the Banks position and have all the necessary documentation and information ready at application stage.
Someone with bad credit, no documents to prove income and have been moving address a lot will struggle to obtain a mortgage. Would you lend to them?
So it may be worth checking your credit score with a company like Experian or Equifax so you and your adviser have all the facts upfront to enable a realistic assessment of your financial position to be made.
Simple things like paying all your credit cards on time and making sure you are on the voters’ roll at your current address will help.
Who can make sure you get the right Mortgage for your circumstances?
As a Qualified Mortgage adviser, I have seen too many mistakes being made by clients having issues with lenders and that’s why I’m an advocate for using an advice driven process. Online comparison sites do not give you advice based on your personal financial circumstances, advisers do!
Bring along your documents to the meeting and the adviser will explain:
- What their services and costs are.
- Identify your needs and explain how a Mortgage works.
- Show you what products are available,
- How much you will need for a deposit.
- How much the repayments will be.
- What the best rate is that matches you needs.
- Make a recommendation to you based on all the information you have disclosed.
Best to get an Adviser who will complete all the forms and submissions for you leaving you to get on with your normal daily activities.
They should also show you what insurance products are available and what you should have in place reflecting your circumstances.
I will show you how much you can borrow…
The amount you can borrow depends largely on your affordability and how you intend to service the debt. This comes back to your preparation, compiling a spreadsheet of your cash flow is a great way to do this.
Many lenders now work on affordability models, which mean they will look at all your income, outgoings, age, number of dependants and other factors.
Obtaining a mortgage is much more difficult than it used to be before the onset of the banking crisis, therefore, the amount you can borrow depends largely on your individual circumstances.
Income multiples vary between lenders and depending on your circumstances, in some instances, you can borrow a maximum of five times your single income or joint income, however, if you have a family or large outgoings, this could be considerably less.
The standard amount tends to be about four times your income.
A simple monthly budget planner detailing all your monthly spending now, and what you expect to pay when you’re a property owner, is worth its weight in gold.
Work out what you really are prepared to “sacrifice” in order to own your own home so there are no surprises and stick to the budget you are comfortable with.
You will need to know how much deposit is required.
Rule of thumb, bigger deposit the better rate you will be able to obtain. This would be down to say 65% loan to value where you will be able to secure most Mortgage deals subject to criteria.
Lenders want to know where your deposit is coming from. It needs to come from your own sources or from a source that the lender will allow.
Make sure you understand what you can use before considering applying for a Mortgage. You’re mortgage adviser can advise you on this.
Sharing the cost of buying your home.
For those who are unable to borrow the amount they need or are struggling with deposits, you may need to turn to the “Bank of Mum and Dad” for help.
There are schemes available which allow parents to act as guarantors on the loan, or to deposit savings with a lender which act as an “insurance” against higher loan-to-value borrowings.
Alternatively, purchasing with a friend or two may let you pool your resources and initially can work very well. The issue may be when one of the parties then wishes to move on at a different time to the others.
It is important to take legal advice before you enter into such a transaction.
You should only consider an interest-only loan if you have a viable way of repaying the loan. Again the lender may ask for evidence of your repayment vehicle so be prepared.
The view that buying a property is as much an investment as a home looks outdated.
House prices are unlikely to rise much in the near future, which is actually a good thing as it makes climbing that tricky housing ladder all the more practical.
Lenders foremost concern when looking at the security they are lending against is: “Would this be easy to re-sell?”
That means, is there good demand in the area and is the property in a good condition?
It is a good principle for you to apply when looking at buying your first home.
Repayment or Interest Only?
Perhaps the biggest change in recent times is the way that lenders view interest-only mortgages.
For those looking to borrow more than 75% of the value of the property, this is now no longer an option for almost all lenders, therefore, a repayment mortgage will be the only way to proceed.
You should only consider an interest-only loan if you have a viable way of repaying the loan, such as savings, ISAs, investments or the ability to trade down to a cheaper property in the future.
Agreement in principle
To make sure you have the best chance of buying a home, securing a mortgage “agreement in principle” (AIP) from your mortgage adviser first is a good start.
This confirms in writing how much a lender will be prepared to lend you subject to them checking the information given to them.
This AIP can then be used to confirm to the vendor your creditworthiness and that you are a serious bidder for the property.
Spending some time researching the different mortgages is time well spent.
Information can be obtained by visiting your bank or online comparison websites, but remember these avenues rarely give you advice unless you specifically ask for it.
A visit to an Independent Mortgage Adviser can help make sense of the vast array of choices and help avoid costly mistakes.
There are also schemes and initiatives involving shared ownership.
This involves housing associations allowing you to buy a percentage share of the property, say 50%, while paying rent on the balance. This brings the deposit required down dramatically. The remaining share can be bought later, when affordable, in stages known as staircasing.
For those looking at purchasing a newly built property, there is also the government Homebuy scheme. Under this scheme, if you qualify, there are two options:
- Receive an equity loan - you get a loan towards the home’s purchase price that has no fees for five years
- Shared ownership - you buy a share of your home and pay rent on the remaining share
You will need to take out a mortgage to pay for your share of the home’s purchase price.
While lenders are undoubtedly being choosy at present regarding who they lend to, for the average buyer there is still a lot of choice, especially for the buyer who takes a little advice and time to prepare.
The opinions expressed are those of the author. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent, professional advice for your own particular situation.