When it comes to applying for your first mortgage, there are many things that need to be taken into consideration.
This guide will take you through what factors are considered and what information you will need to provide in order for you to make your first successful mortgage application as a first-time homebuyer.
You will need to have a stash of savings to place as deposit on a property. This article outlines the different ways the UK government is helping first-time homebuyers and home movers. Alternatively, you could raise the deposit funds with the help of a family member.
First, you should find your credit history report and most importantly, make sure that there is no incorrect information about you on it. This may include;
Once you are satisfied that the information is 100% correct, you can examine your score and figure out if there is anything you can do to rosy-up your rating.
This Guide to Improving your Credit Report is full of handy hints on how you can do this.
When choosing a mortgage, you must consider how you would like to repay it (i.e. interest only or repayments) and over how many years. Traditionally, mortgages last 25 years, but you can get them for 20-30 year periods. You can even find mortgages that must end on the applicant’s 85th birthday.
The longer your mortgage term, the lower your monthly repayments will be. However, the longer your mortgage lasts, the more interest you will pay in total. Taking a longer mortgage term is beneficial for those who need cashflow, extending the term can also help you meet affordability criteria that you wouldn’t necessarily be able to meet if you chose the standard 25-year term.
A financial advisor can help you make the best decision by giving you specialist advice from their years of experience.
Take a look at this Guide to the Benefits of Broker Advice, for more about how their services can help you.
These will vary from lender to lender, but typically you will need;
Every lender has its own criteria for approved borrowers. Lenders will assess your mortgage affordability based on your current level of income. If you are buying a house with a partner, they will look at the overall combined household income. They will take into account not just your basic income, but income plus any benefits and/or commission earned in your job. They will also look at money earned from any second/freelancing jobs.
The lender will also need to assess your current level of debt, to make sure that these costs, plus a mortgage payment every month, wouldn’t leave you struggling.
Typically, this stage of the application process is known as a ‘stress test’. For example, if you were to apply for a Standard Variable Mortgage how would you fare in the circumstances, should the Bank of England Base Rate were to increase dramatically? Could you still afford the mortgage as well as pay your utilities and debts?
Mortgage providers also take into account your ability to keep up with your repayments, should your fixed-term contract of employment end for example, or if you were to go on maternity leave.
Before your application is processed by the lender, you will be given a Key Facts Illustration (KFI) this is a formal document which outlines the lender’s full terms and conditions for the loan. It shows the address of the property, the interest rate, main fees associated, total cost of the mortgage and it will tell you if the mortgage is portable. A copy will also be sent to your legal representative.
In seeking independent financial advice, you will be informed of the exact costs of making a mortgage application and this figure can of course vary. Some brokers do receive a commission from the lender, should you sign up. Alternatively, you may be charged for their services upfront.
Read more in this Guide to the Benefits of Brokers.
You should also note that if you approach a lender directly, these charges may be wavered in order to incentivise you to take up a mortgage with them.
You will also have to factor in some extra costs in securing a mortgage and buying a house, these may include;
Buildings Insurance – You may be required to pay a fee for buildings insurance if you choose to shop around and not opt for the buildings insurance offered by your lender.
Mortgage Life Insurance – If you intend to make the largest purchase of your life and you have dependents or a partner, you need to make a contingency plan for the loan. As with building insurance, your lender may offer you a Mortgage Life Insurance plan. However, shopping around could save you money.
These costs will be outlined in detail on your Key Facts Illustration document. You will also be given the choice of paying the fees upfront or incorporating them into your mortgage repayments.
Grace is looking to buy her first home. She earns £32,000 a year and has saved a £15,000 deposit. She is looking for houses for sale up to a maximum of £150,000 in value. She has been offered a 90% LTV Mortgage, with the extra fees broken-down into the following figures;
In taking these costs into account and the additional costs associated with moving into a new home (i.e. broadband set-up, maintenance repairs etc.), Grace opted for a mortgage deal where the product fee was absorbed into the cost of her mortgage.
When considering which mortgage option to go for, you should pay close attention to the lender’s Annual Percentage Rate (APR), this will show you the total yearly cost of the mortgage product. This will be expressed as a percentage of the loan amount.
Please Note: From March 2016, lenders must use Annual Percentage Rate of Charge (APRC). This encompasses the annual cost of the mortgage (as a loan percentage), as well as any fees associated with the mortgage, including valuation fees and redemption fees.
Please see our Guide to Mortgage Types for more details on how mortgages can be repaid and when extra charges may be applicable.
The mortgage application process takes around four weeks to complete. If you are successful, you will be offered a Mortgage in Principle. This agreement is valid for 3-6 months and lets estate agents know that you are an acceptable candidate for putting on offers in their portfolio.
If the Mortgage in Principle agreement is not actioned within the 3-6 months of it being issued, you will need to apply again. Be careful about applying for too many mortgages, as these applications leave what is known as a ‘hard footprint’ on your credit report. This means that your credit rating could be negatively affected if you seek, but don’t take up, too many offers for mortgages.
It is possible to extend this deadline in extenuating circumstances, for example, you may be buying a new build property and the building work has yet to be completed.
It is also possible for the lender to revoke your application during this time. They may do this if, for example, you have been made redundant during the 3-6 month period.
If the lenders you approach reject your application for a mortgage, don’t get disheartened, there may be steps you can take to get a better result next time.
Some of the reasons you may have been rejected this time around may include;
Ultimately, lenders will vary on who they lend to and the criteria and documentation they need from you in your application. However, this article may have given you some pointers on how banks and building societies assess your level of ‘risk,’ when they consider offering you a loan.
For personalised advice, unique to your circumstances, it is always wise to consider advice from an independent source. Get in touch today, and receive your free quote.
My biggest concern was finding a mortgage with no strings attached. My options were clearly explained to me and I felt confident about the decision. Alice Silverman, Stoke-on-Trent
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATION EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
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