Applying for a mortgage can be a long winded process. Even the most straightforward of applications can see the lender coming back to you for further information several times.
There are a number of things you can do in preparation and the earlier the better, 6 months to a year is ideal. By following these few suggestions not only will you stand a better chance of being successful with your application, it will speed things up as well.
The very first thing to do is get a copy of your credit report. All lenders rely on this so you need to find out what is being said about you first. Check it thoroughly. If there are any points of contention you will have to contact the company that has filed the information about you, not the credit agency, the credit agency will not help you.
One thing that can blow you out of the water before you even start are payday loans. If you have ever had one, even if it was for a small amount and cleared early, it will drastically reduce your chances (and definitely your choices)
The next thing to do is look at your previous 12 months of bank statements. Lenders will put a lot of weight on your spending habits as they will your income. Go through them with a fine tooth comb. Look at what you are spending your money on. If you regularly play the lottery they will count it as a regular expense and reduce their offer amount accordingly. If you have a takeaway every Friday night, they will again treat it as a regular expense. You get the idea.
You need to coldly look at your statements and see whether you can alter your spending patterns so that they appear more attractive to a potential lender.
Check all your direct debits. Make sure they are all necessary as they will be deducted from your affordability calculations. If you haven’t checked your insurance and utilities to see if you are on the best tariffs, now is a good time to do so.
If you have any loans or credit cards, look to see how the balances can be reduced or, better still, eliminated completely. Outstanding balances will reduce the amount that will be offered by a lender. Do not take on any new credit agreements at least six months prior to to making an application. One nasty surprise at present involves people with finance agreements for their cars. These are extremely popular now, however a £200 a month agreement for a few years will be treated as a £2,400 reduction in your disposable income and will have quite a negative effect of the amount you can borrow.
Obviously, any lender will be interested in your income. Not only will they want to know your earnings, they will want to know how they are made up. Basic salary, bonuses, overtime and commission can all be used in calculating you income for mortgage purposes. If you are self employed, talk to your accountant. Tell them you are thinking of applying for a mortgage and tell them to be prepared to provide your income details and possibly an earnings forecast for the next 12 months.
From a lenders perspective, a permanent job, held for at least 6 months is ideal. Rolling contracts, jobs with wildly varying bonuses and/or commission will be scrutinised and possibly not taken into account in its entirety. Self employed earnings are typically judged over the previous three years. They will want to see steady growth, or at the very least, consistency. If it is a new venture, they may start asking for accountants forecasts (for which the accountant will charge!) If the income shows a decline, or wide fluctuations, then you will struggle to persuade them to take it into account at all.
Although 100% loans have made a rare comeback, they are very much the exception. A minimum of 5% is really the lowest you can get away with, but you won’t find the best deals at that amount. Unsurprisingly, the bigger the deposit the greater choice of loan and access to the better deals.
Be Prepared For Costs
In addition to the deposit, there are lots of other costs to consider, these can include:
Mortgage arrangement fees which can be up to £3k, but are typically £1 – £2K and usually have the option of being added to the loan.
Mortgage Booking fee which some lenders charge just for applying with them and cannot be refunded. Typically £50 – £300
Valuation Fee. This is the cost of valuing the house you are buying so the lender can work out what they will actually lend you. If they value the property at less than what you have offered the seller, then you either have to renegotiate, pull out, or make up the difference from your own resources.
A Valuation is just that, it will not give you detailed information about the real condition of the house, just whether it is worth enough for the lender to secure their loan. If it is a much older property, then you might consider a much more expensive survey so you are not faced with serious costs to repair it. A standard Valuation costs about £150 to £250 for an average priced property. Sometimes though the lender may have an offer and give the valuation for free. An in depth survey can cost up to £1000 or even £1500. However, this type of survey will give you detailed information about the property and can save you a lot of money by highlighting any structural problems before you are committed to the purchase. (Be aware that even if you have a full survey, the lender may still insist on their own valuation as well).
CHAPS. Yes, unbelievably you will be charged about £50 for transferring the funds from the lender to your solicitor.
Mortgage admin fee. The lender will charge for the administration of your mortgage account. About £300.
Broker fee. Using a broker will likely give you the best chance of getting the best deal for your circumstances, and they will (or should) take the time to give you actual advice. Unlike a bank or high street lender who do not give advice (in the main – very, very few exceptions do exist) A broker can cost between £250 and £500 depending on the difficulty of the case. To give you the best options you should use a broker that is fully qualified to give whole of market advice, and has a fair bit of experience under their belt. You are paying for their expertise, don’t be shy about questioning their credentials.
Your own legal fees can be up to £1000 and include things such as your own solicitors costs and Land Registry.
Stamp Duty – If you are buying your first home, and it is less than £300k you are exempt from paying stamp duty. Click here to go to the link for the complete scale of Stamp Duty costs.
Lastly, don’t forget the more hidden costs such as the physical cost of moving and the immediate costs of moving in and buying new furniture, carpets, curtains and a welcome mat. These can add up as well!
About The Author
George has over 35 years experience in the financial services sector working as a consultant, in Insurance, Mortgage, Commercial Finance, Equity Release as well as Investment and Pension sectors. After retiring for 4 years and not liking it, he now acts as a business consultant to a Mortgage, Commercial Finance and Equity Release online enquiry service.
He also hosts #1PMChat and is very happy to answer questions that are DM’d to him through his twitter account @RetiredBroker or emailed to Emeritusbroker@gmail.com