Maybe you have seen my post on home owning and despite all my words of warning have decided you want to buy you own home anyway. Well, as promised here are five things you will want to get in order before applying for that mortgage.
Deposit, Savings and Debt Busting.
If you intend applying for a mortgage, you should already be working on that deposit, with the recommended amount being 10% of the purchase price of home you intend buying. However the deposit will not be the only fees involved and saving ‘too much’ is never going to be a problem; there will always be something to spend that money on: surveys, solicitors fees,moving costs… If you can stretch to a 15% deposit you will potentially bring down the LTV on your proposed new home and get better rates. The LTV is the Loan to Value; how much you owe the bank verus how much of the purchase price you have paid yourself. Many banks will lend up to 95% on purchases, but if you are able to reduce this with a bigger savings pot, then you may be able to access lower interest rates and save money over the term of your loan.
While a good deposit is important you should also work on reducing your DTI; your Debt to Income. Even if you are making all of your payments regularly if a bank believes the amount of debt you have is high in comparison to your income this could have an impact on whether they will lend you money.
What is going out?
While the focus is always on saving when you are looking to buy a home, you need to also consider you current outgoings. Credit cards, store cards, loans, including student loans and childcare costs will all be looked at and affordability will then be calculated. If you have paid off credit cards be sure that you actually cancel them, rather than just cut them up and forget about them. If you haven’t cancelled them the amount of credit available may still appear on your file even if you are not using them. Look at your credit commitments and which ones you can potentially reduce to help improve both your credit rating and affordability when you finally move into your dream home.
You’ve read the tips that suggest you get a credit card (that you definitely pay off every month!), or a small low interest loan to build up your credit standing. Be sure to keep notes of how often you apply for credit, because even when you are refused a record is kept on your credit file. It is worth checking one of the free sites to find out your current credit standing, some even offer tips on how to improve it; what you could stop doing and what you are doing well. One of the more important aspects of good credit that is often overlooked is when someone has lived at an address for more than 3 years, and they are on the voters register. Due to it being a legal requirement there is an expectation from lenders that you will be on the voters roll at your current address, and questions will be asked if there appears to be gaps. Even if you are apolitical and choose not to vote, always make putting yourself on the register
one of your first jobs when you move into a new home.
Also, never think that you can miss out a few addresses when asked for your residential history – banks have their ways of finding out, and will be suspicious if you haven’t disclosed all of the places you have lived.
Save that paperwork.
The bare minimum that you may be required to show, depending on your lender, will be 3 months payslips and a full months bank statement – preferably one that can reconcile the salary credit that appears on your payslip. Remember if you are paid weekly, you will need about 13 payslips.
Just two quick notes on bank statements – I know a lot of people have online banking now, and as such don’t receive postal statements, but if you intend to apply for mortgage it is worth having the statements arrive at your home address via the post as it can be seen as further proof of residency. The second note will not apply to everyone, but when you transfer money to friends and family through online banking, be careful with regard the wording you use ; I’ve seen bank statements where boyfriends have jokingly paid back their girlfriends and used ‘sexual favours’ as the reference. Not the greatest impression to leave on a potential mortgage lender!
If you are self-employed you will need to produce your SA302’s and tax overviews to prove your income or certified accounts, depending on the lender, as well as business bank statements.
Wages, Employment and How Much You Can Borrow.
The amount a company will lend you is entirely depend on their own criteria, but as a general rule lender will calculate an amount that is between 3 to 4 times your annual wage. Remember that your bonus and overtime payments may not necessarily be included when calculating how much you can borrow, and benefits are often not included as they are not a guaranteed long term income. You will be looked on more favourably if you have been in your job at least 6 months or so, although the longer the batter.
If you have been on maternity leave some lenders will also need confirmation that you are returning to your job from your employers.
So hopefully these tips will help you as you save for that new home, and help you start putting things in place.
One final thing I was told during a mortgage course was that people should really look at mortgages before they look at houses; they should find out how much they can borrow, and how much they will be expected to pay in fees before finding their dream house and realising it is outside of their budget.
If you are now home hunting, ‘Good Luck’, and if you can think of any other homeowner related posts that might help you, let me know in the comments.