The mortgage process can be a bit of a mystery for first-time buyers. It's not always easy to know where to start, what paperwork is needed and what the next steps are. We've compiled some helpful tips and resources from our experts below that will help you get on your way to buying your first home!
What is a mortgage?
A mortgage is a loan that allows people to buy property, whether it is as an investment or as their home.
Investors lend money to people who want to buy property, in exchange for monthly payments of interest and, eventually, the full market value of the house when the 'mortgage term' has elapsed.
Will I own my home if I have a mortgage on it?
When you take out a mortgage you will own the property that has been mortgaged however the lender will have a legal charge over the property. This means that if you fail to make payments on your loan, usually because you are struggling financially, the lender can gain possession of your home.
What happens if I can't keep up with my repayments?
In most cases, the lender will try to work with you and ask for a payment plan to help you meet your mortgage commitments first, but in severe circumstances where this is not possible, and they can take control of your house known as repossession.
Who regulates the mortgage industry?
In the UK mortgages market is regulated by the Financial Conduct Authority (FCA). The FCA sets the rules on how lenders can operate and provides guidance on how peoples affordability should be assessed.
How do you apply for a mortgage?
Some people go directly to their bank or building society, they will talk to you about their mortgage deals. However, they won't talk to you about the thousands of other deals that are available from other lenders.
To get the best advice on mortgage loans, you need to see a mortgage broker. The "whole of market" brokers have access to deals from all mortgage lenders, which means that they will be able to provide a larger selection of current offers than those available through any one mortgage lender.
What does a mortgage adviser do?
A mortgage adviser will take care of the entire mortgage application process. They will find the best and most suitable mortgage deal for you. Your mortgage adviser will discuss different types of mortgages, such as fixed-rate and variable-rate mortgages.
They'll also look at the potential costs involved with your mortgage application and discuss whether or not you'd be able to afford the monthly mortgage repayments if interest rates increased. There are also many mortgage products available that have reduced payment periods and lower deposit requirements.
Which lender is right for you?
You'll need to provide financial information like your gross monthly income, the value of any other savings or investments, what size deposit you're able to put down as well as details on your living costs.
Most lenders all have different criteria depending on personal circumstances such as credit scores, payment habits and retirement savings. A good mortgage advisor will know each lender's criteria and will be able to match you to the most suitable mortgage lender for your circumstances.
What documents will you need to provide?
As with different lending criteria, each lender has different documentation requirements. However, most will want to see:
- if you are employed you will need payslips for the last 3 months;
- for business owners such as those self-employed, or limited company directors and contractors your income must be evidenced through documents such as your official accounts or tax return.
- 3 months worth of bank statements;
- at least 2 pieces of identification such as a driving licence or utility bills
There may be other documents that you need to provide, make sure you mention to your mortgage advisor if there is anything additional that they should know about such as missed payments.
Will your credit file or credit score be checked?
When you apply for a mortgage, as part of the qualifying process you may be subject to two types of checks: your credit will go through a soft credit check during qualification, and then a full credit check once you advance to the lender stage.
As part of the process, your broker will likely want to see a copy of your credit report. These are available one of three credit reference agencies in the UK (TransUnion, Equifax and Experian).
If you have had issues with your credit score and have a poor credit rating, lenders may be skeptical about loaning to you in the form of a formal mortgage offer. You'll need to use a specialised lender which can mean paying a higher interest rate.
What are the stages of getting the mortgage application process?
Most mortgage applications usually go through the same three main stages when you apply for a mortgage:
- A decision in principle (also known as an agreement in principle)
- Mortgage application, underwriting and valuation
- Mortgage offer and completion
Stage one - Decision in principle
In stage one, your advisor will be able to give you a rough idea of the type of products and interest rates that might be available to you based on what you've told them about your income, financial background and personal circumstances.
Stage two - Mortgage application, underwriting and valuation
In stage two, your adviser will submit your formal mortgage application to the lender, they'll take all this information and make sure it matches up with that held credit reference agencies who hold copies of your credit history. The lender will also arrange for a valuation to assess the property value, usually liaise with your estate agent to arrange this.
Once they have all the information your lender will then decide whether or not to give you a mortgage offer.
Stage three - Mortgage offer and completion
The final stage is called completion, once the lender has given you a formal mortgage offer, where all the details are agreed upon and you accept their terms. This is the stage where you sign the mortgage offer and the lender gives you all the documents to make it a legally binding contract.
Your deposit and how it works
The days of 100% mortgages are long gone, lenders require you to pay a deposit of at least 5% of the purchase value, this is known as loan to value (LTV). For example, if you're buying a £200,000 property and need to put a 5% deposit down, that's £10,000 or 95% LTV.
You should bear in mind that the bigger your deposit, the lower your rate is likely to be, as a lower LTV means you're paying less interest on the loan. You can use our range of mortgage calculators here to help plan for your deposit.
What should you not do before applying for a mortgage?
As well as not going out and buying expensive items on credit, it's also a good idea to:
- Not take out additional loans or get more credit for anything that isn't essential to make sure you can afford the repayments although this will get flagged during credit checks.
- To pay off as much as possible of any existing debts (such as credit cards, car finance) to help improve your credit score.
- Finally, it's also helpful to avoid changing your employer or job during or very close to when you apply for a mortgage, as it could delay the process if you are in probationary periods or require historical payslips to help prove steady income.
How long does a mortgage application take to be approved?
Normally the process from starting the application process to getting your offer of a mortgage can take 4-6 weeks, but it's best to start the process sooner rather than later. Applying for a mortgage can be quite time-consuming in terms of paperwork and documentation so you'll need to find out what kind of proof your lender wants to see before going ahead.
You should ask your adviser specific questions about how long they think it will take, particularly if you are in a complicated scenario.
What are the common reasons a mortgage application is denied?
There are several reasons why a lender might turn you down for a mortgage, some of the most common reasons are:
- Lenders like to see that your income is steady and certain. If it's variable or uncertain due to shifts in overtime, commission-based work or self-employment then you may want to delay applying for a while until your income becomes more stable.
- The valuation of your property is too low. Likewise, if your property has been valued at less than you thought it would be by the lender's surveyor, then that may be another reason for them to turn down your mortgage application.
- There are concerns about affordability and the ability to make repayments over the long term. You could have a large income but not enough capacity to absorb increases in monthly payments.
A good mortgage adviser should be able to give you their best estimate of your chances of getting a mortgage. They will take into account your current income and expenses as well as your credit record and the type of property you're looking to purchase in order to assess whether it's worth applying for a new mortgage or not.
When should you start the mortgage application process?
It's a good idea to start the process of applying for a mortgage sooner rather than later. Applying for a new mortgage can be quite time-consuming in terms of paperwork and documentation, so you'll need to know the kind of proof your lender wants to see before going ahead, especially if your self employed. A mortgage agreement in principle is a great start and will give you an indication of how much you may be able to borrow and many estate agents ask for this prior to showing you properties for sale.
We're here to help
Before taking any action though, let us help you find the right mortgage deal and take away the stress and time commitment of applying for a mortgage on your own. If you have any questions or would like some more information, please contact us at The Mortgage Stop tel: 01794 379 379 or email: firstname.lastname@example.org
Your home may be repossessed if you do not keep up repayments on your mortgage