The purchase of your first property is an exciting time, whether you’re looking to buy a new property or a ‘fixer upper’ to put your stamp on. But it’s important to understand the mortgage process. The mortgage approval can seem somewhat overwhelming and confusing, so understanding the ins and outs can help increase your chances and elevate what can be a stressful time.
It’s no secret that the mortgage approval process can be challenging. But there are things you can do to give yourself the best chance of success.
Review your budget and cut back on spending
When you apply for a mortgage, it’s important to review your budget and make sure you’re not overspending. Cutting back on your spending can help you qualify for a lower interest rate and save money in the long run.
If you’re not sure where to start, try looking at your monthly expenses and see where you can cut back. You may be surprised how much money you can save by making small changes to your budget. So, before you apply for a mortgage, make sure you review your budget and cut back on your spending.
Check your credit report
Your credit report is one of the most important factors that lenders will consider when you apply for a mortgage. It’s a good idea to check your credit report before you apply, so you can be aware of any potential problems that could arise. This will give you an idea of your creditworthiness and help you avoid any potential problems with your application.
There are a few things to look for when checking your credit report, such as:
Any missed or late payments on previous loans or credit cards
Any County Court Judgments (CCJs) against you
Any bankruptcy or insolvency proceedings against you
If you have any negative items on your credit report, it’s important to try and improve your credit score before applying for a mortgage. You can do this by making sure you make all future payments on time and by clearing any outstanding debts.
If you have a good credit score, you’re more likely to be offered a competitive mortgage deal. So it’s worth checking your credit report before you apply.
Save diligently for a deposit
Saving for a deposit is one of the most important things you can do to increase your chances of being approved for a mortgage. Most mortgage lenders will typically require a minimum deposit of at least 5% of the property’s purchase price, so it’s important to start saving as soon as possible.
Mortgages are offered with a maximum loan-to-value (LTV) ratio – the percentage of the property price that you need to borrow. For example, if you save a 10% deposit and apply to borrow the remaining 90% of the purchase price as a mortgage, your LTV will be 90%.
In simple terms, the bigger your deposit, the lower your mortgage amount will be, as well as your LTV. Additionally, the lower your LTV is, the lower the interest rates lenders may offer. So the sooner you have your deposit saved, the sooner you can start shopping for your dream home.
Here are a few tips to help you save for a property deposit:
Start with a realistic goal in mind. Determine how much you’ll need to save based on the purchase price of the type of property you’re interested in.
Make a budget and stick to it. Cut back on unnecessary expenses and put any extra money towards your savings goal.
Consider opening a separate savings account specifically for your deposit. This will help you keep track of your progress and make it less tempting to spend the money on other things.
Automate your savings. Set up automatic transfers from your checking account to your savings account so that you’re automatically saving every month.
Stay disciplined. It can be tempting to dip into your savings for other purposes, but try to resist the urge. Remember, the sooner you have your deposit saved, the sooner you can start shopping for your dream home.
Saving for a property deposit takes time and discipline, but it’s worth it if it means achieving your homeownership goals. By following these tips, you can make the process a little easier and increase your chances of being approved for a mortgage.
Assistance with deposits
The mortgage guarantee scheme, which launched on 19 April 2021, has helped to increase the supply of 5% deposit mortgages by supporting lenders to offer these products through a government-backed guarantee on new 95% mortgages.
This is set to run until 31 December 2022 and applies to first-time buyers and people looking to move to a new home – as long as they have a deposit of between 5% and 9.99%. This essentially means that you may be able to buy a property with just 5% saved as a deposit, although your mortgage may be subject to other fees or higher interest rates.
Alternatively, the ‘Bank of Mum and Dad’ support can take many forms, such as helping to fund a deposit or acting as a guarantor on a mortgage. The most common form is for parents to simply give their children money to help them buy a property.
Find out how much you could borrow
Lenders will typically use an income multiple of 4 to 4.5 times salary per person. For example, if you earn £30,000 a year, you may be able to borrow anywhere between £120,000 and £135,000. However, some lenders may offer a mortgage that is 5 times your salary.
Seek to obtain an Agreement in Principle (AIP)
There are a number of benefits to seeking an Agreement in Principle (AIP) from a lender before you start looking for a property to buy. An AIP is a statement from the lender that, based on the information you have provided, they are likely to lend you a certain amount of money.
This amount is not guaranteed, and is subject to further assessment once you have found a property, but it does give you an indication of how much you could potentially borrow. It can also speed up the mortgage application process once you have found a property, as the lender will already have some of your information on file. And, in some cases, having an AIP can make you more attractive to sellers as it shows you are serious about buying and have the finances in place to do so.
Consider which mortgage type would suit you best
If you’re considering taking out a mortgage, it’s important to understand the different types of mortgages available and which one would suit you best. Here’s a quick guide to the different types of UK mortgages:
Fixed rate: An initial interest rate is fixed for an agreed period of time (usually two, five or ten years), after which it reverts to a variable rate loan, but can be fixed again based on the current interest rates
Variable rate: These loans have an interest rate that can go up or down in accordance with the lender’s base rate
Interest only: This loan structure allows you to only repay the interest charged each month until the end of the loan term, upon which the remaining principal balance is due
Tracker: This is a type of variate rate mortgage that tracks a specific base rate – such as the Bank of England’s base rate
You will also need to consider what mortgage term will work best for you. The term of a mortgage relates to how long it will run. Standard mortgage terms typically run between 25 to 30 years. The longer your term, the more spread out your repayments will be and this may make your repayments lower, but it may also cost you more in interest in the long run.
Prepare your paperwork
When you apply for a mortgage, your lender will require a variety of documents, so it’s best to have these organised in advance.
The documents required will include:
Photo ID (driver’s licence or passport)
Utility bills addressed to your current residence
Up to six months’ bank statements
A P60 and/or three months’ payslips
Self-employed applicants will also be required to supply:
Two years’ self-assessment tax returns
HMRC tax year overviews
A minimum of two years’ certified accounts
Contractors will also need to provide evidence of any future secured contracts
How long does it take to get a mortgage?
It can take anywhere from a few weeks to a few months to get approved for a mortgage. The exact timeline will depend on your lender, your circumstances and the type of mortgage you’re applying for.
The first step is to submit your mortgage application. Your lender will then assess your financial situation and decide whether or not you’re eligible for a mortgage. If you are approved, the next step is to get a valuation of the property you’re looking to buy. This can take a few weeks.
Once the valuation is complete, your lender will provide you with a loan offer. At this point, you’ll need to decide whether or not to accept the loan offer. If you do accept, the next step is to sign the mortgage contract and pay the deposit.
Once the mortgage contract is signed, your lender will arrange for the money to be transferred to your solicitor. This can take a few days. Once the money has been transferred, you’ll need to complete on the purchase of the property. Completion usually takes place around four to six weeks after you’ve accepted the loan offer.
Buying a home is probably one of the most significant purchases – ready to start a conversation?
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