You’re a first time buyer, excited about owning your own place - it’s easy to get carried away and launch yourself into house hunting. But, if you will need a mortgage to fund buying a house, you should put arranging your finances first.
There are certain things to do before you apply for a mortgage and it’s worth starting the preparation a few months in advance. This will help you be clear about what you can and can’t afford. If you have an agreement in principle (AIP) from a mortgage lender, you will be a better prospect for estate agents and vendors, plus, it will help speed up the process once you find your dream home.
To help you through what can be a baffling process, we’ve nailed down seven things to do before you apply for a mortgage.
1: Decide what type of mortgage you’re looking for
There are different types of mortgages out there to suit different life stages, needs and budgets. Think about whether you need the security of a fixed rate or prefer a tracker or discount mortgage, which varies as interest rates change and may or may not be cheaper long term. There is plenty of information out there about the pros and cons of each, along with mortgage calculators and up-to-date mortgage rates on websites such as Which? or MoneySavingExpert.com or from mortgage brokers.
2: Make sure you are registered to vote
The electoral roll is a key tool used by mortgage lenders to check your identity, so not being registered could harm your application. With a UK general election just out of the way, chances are most British citizens are registered. But if you aren’t, or have recently moved, contact your local council now.
3: Check your credit rating
Mortgage companies will be using credit reports to check that you are a good long-term bet by finding out how responsible you’ve been with credit in the past. Checking your own credit rating first is a vital step and should be done well before the lenders start looking into your credit history.
The reports will list your credit cards, loans, overdrafts, mortgages, mobile phone and utility payments over the past six years.
There are three credit reference agencies in the UK; Experian, TransUnion and Equifax and you need to look at them all because you don’t know which one your lender will choose to use.
There used to be a charge for seeing your credit report, but the change in law regarding data protection (GDPR) in May 2018 means you can now view them for free.
Check whether everything in the reports is accurate - if it isn’t, contact the lender to have it put right. If this doesn’t work, you can contact the financial ombudsman
If your credit score is low, you may need to put off applying for a few months while you improve it - see point 4!
4: Get your finances under control
If you have debts or a history of missed payments, you should act now to put things right. You need to reduce your debt-to-income ratio - the proportion of debt that you have in relation to the money you have coming in. Lenders tend to prefer applicants with a lower ratio, who are more likely to meet their monthly payments.
Don’t make any new applications for credit in the six months before your application and make sure you haven’t missed any payments or defaulted on any bills for at least a year.
This might mean tightening your belt and prioritising your homebuying project. Cutting unnecessary spending is also a good idea because lenders will be scrutinising your bank statements for anything that indicates that you aren’t responsible with money.
5: Close inactive credit accounts
Assess all your credit cards and accounts, closing any that you haven’t used in a while. It doesn’t look good to have too much available credit. Don’t close them all though, you need to have some credit cards to be able to demonstrate that you can use them responsibly.
6: Get all your paperwork in order
When you make your application, you will need to provide proof of ID, employer details and up to six months of bank statements. Your lender may ask for originals rather than copies or print outs.
As proof of identity, you’ll need your passport or a photo driving licence – make sure it has your current address. You'll also need two documents as proof of address; a bank statement, utility bill, council tax bill or credit card statement, dated within the last three months.
Check you’ll be able to get your hands on these documents – this could be difficult if you have a lot of direct debits and paperless bills. Also, check that all documents have the correct spelling of your name and address.
To prove your outgoings, you'll need bank and credit card statements for up to six months, plus details of any loans and other regular payments such as childcare or travel.
You may need your P60 and payslips for the past three months. If you're self-employed, you’ll need self-assessment records of tax returns for the past three years.
You will also need to show proof that you have the cash for your deposit. If someone is giving you the deposit, you’ll need a letter to prove it’s a gift, not a loan that they may want back in future.
7: Apply for a mortgage AIP
Once you’ve completed these steps, you can approach a lender and apply for an AIP. The AIP is a conditional offer, based on a quick check – it doesn’t guarantee you a mortgage or lock you in to using this lender.
Look on comparison sites for the best mortgage deals available and approach a lender. Don’t be tempted to ask for too many AIP checks as they may appear on your credit file. Some lenders carry out a ‘soft’ search which won’t show up to other mortgage companies – so it’s worth checking about this first. An AIP will usually last for up to nine months.
What if your application is rejected?
Don’t make another application to a different lender immediately – it could affect your credit score. Go through your application and your credit report again to check that you haven’t missed anything. You can also contact the lender to ask why your application was rejected.
If you are a first time buyer, looking in central London, we can advise you about the steps you need to take and show you our range of properties. Contact us to find out more