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Looking for a mortgage deal?
If you’ve been busy house-hunting in recent weeks, and found your dream home, you will probably need a mortgage to buy it (unless you’re in the very fortunate position of being a cash buyer).
You will need to put down a deposit, and then require a bank or building society to give you a home loan to cover the remainder of the cost.
As with any loan, you have to pay interest on the monthly repayments.
When applying for a mortgage, you will be required to provide your personal details, and lots of information about income and expenses.
A lender will use this to carry out an affordability assessment to see if they are happy about lending you the money you want. They will conduct a stress test to see if you would still be capable of sustaining your monthly repayments, even if interest rates suddenly increased and costs went up.
Making a mortgage application can feel quite overwhelming, and especially if you’re a first time buyer who is new to the process.
Here’s a look at some of the questions you are likely to get asked.
A lender will want to know what job you do, and how much you earn. They will use this to work out how much to lend. While income requirements can vary from one lender to the next, generally speaking, borrowers can get a mortgage of up to 4.5 times their income. If you’re buying with someone else, banks and building societies will lend up to four-and-a-half times the total income.
If, for example, your total household income is £60,000 a year, you might be offered up to £270,000.
Lenders will need you to provide proof of income. While this is easy if you have an employer and get payslips, if you are self-employed, you will typically need to produce at least two year’s accounts, detailing income, expenses and operating costs.
Lenders will be keen to know about regular outgoings and expenses such as food and bills. They will also be keen to find out about your lifestyle, and how much you spend on things such as hobbies, leisure activities, eating out and socialising. They may request up to six months’ of bank statements. Be prepared for a lender to go through these statements with a fine tooth comb.
Don’t panic if you have debt, as owing money isn’t necessarily a bad thing. It can be a way to demonstrate to a lender that you are a responsible borrower, capable of paying back a set amount each month.
That said, too much debt could set the alarm bells ringing as it could suggest you are not in control of your borrowing.
If you don’t already have children, a lender may want to know if this is part of your plan for the future.
Lenders will want to factor in any children you already have – or plan to have further down the line – when calculating affordability. This is because children can take a big chunk out of the family finances.
They will want to know you will still be able to afford your mortgage repayments when faced with additional costs, such as childcare.
When you make a mortgage application, all lenders will carry out a credit check. They are looking to see a strong track record of repaying debts.
If you have blemishes, such as arrears or county court judgements (CCJs) on your credit file, these can lower your credit score. Lenders may be less willing to lend to you, as they will view you as more risky.
Marks will stay on your credit report for six years, though their impact should lessen over time.
Even something seemingly innocuous, such as missing a bill by a few days, can impact on your score.
In the run-up to making a mortgage application, pull all the stops out to ensure your credit score is in good shape – to improve your chances of getting accepted. Read more here.
Take a look at your credit report yourself before applying. You can check your score and report for free with our Credit Monitor tool.
If you find any errors on your file, you should get these corrected, as incorrect or out-of-date information could affect your ability to get accepted for credit. For more tips on boosting your credit rating, read: How to improve your credit score quickly
The lender will look at the size of the deposit you have to put down, and the mortgage needed to cover the outstanding amount. If this is more than 4.5 times income, this property may be out of your price range.
For example, if you were buying a £200,000 property with a 90% loan-to-value (LTV) mortgage, you would need a deposit of 10% which is £10,000. You would then need a mortgage for the remaining 90% which is £190,000. You would need earnings of least £42,000 to be in with a chance of getting accepted for a mortgage.
When lenders offer mortgages, they will offer more competitive rates to those borrowing at a lower LTV.
As these borrowers are putting in more of their own money, this is a much less risky proposition for a lender than a borrower with a small deposit.
As the mortgage process can sometimes be long and stressful, it pays to be prepared.
Spend time getting all your ducks in a row before starting an application, and make sure you have all the requisite paperwork to hand.
By familiarising yourself with the questions you might get answered – and how things work – you can help make the process feel a whole lot less daunting.
Looking for a mortgage deal?
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