For the majority of the population, purchasing a property will be the largest financial investment they will ever make, so it makes sense that they give the decision the due diligence it deserves and prepare accordingly. Before applying for a mortgage, you will need to ensure that you have assessed your financial situation and answered a few pertinent questions before approaching your bank for property finance.
“Many first time mortgage applications are rejected on daily basis, which highlights the importance of being financially prepared before putting in an application,” says Peggy Su, Regional Director of RE/MAX London. She provides a few financial questions that applicants should answer before they approach their bank for a mortgage:
What is my credit score?
A favourable credit score and clean credit record is a valuable asset when applying for a mortgage. Applicants can obtain a free copy of their credit report from credit bureaus such as Experian or Equifax to assess their financial position.
“Any missed, or slow payment will have a negative impact on your credit score. However, it is also important to be mindful of the less obvious credit infractions such as opening too many accounts, and numerous credit enquiries. All of these things will impair your records and could scare off lenders,” Peggy Su explains. “Reducing the number credit cards you have and ensuring you are on the electoral roll will both aid in boosting your credit score.”
What is my annual income?
As a potential home buyer, the maximum mortgage amount that you can qualify for will be based on your annual income, so be sure to include any bonuses or annual investment returns when making this calculation. Mortgage lenders will require proof of income to quantify the mortgage amount, so you will need a P60 form from your employer and possibly three months’ bank statements and payslips.
How much debt do I have?
Another major consideration that banks take into account when determining the mortgage amount they are willing to grant is the applicant’s amount of disposable income. “To increase the disposable income you have available, get rid of or pay down debt as much as possible. Lenders will require you to provide them with all the debt you currently have to work out a debt-to-income ratio, which will be used as a tool to determine your level of affordability,” says Peggy Su. “Having a lower debt-to-income ratio will be highly beneficial as it will increase the chance of gaining approval for a higher mortgage amount.”
What kind of deposit can I put down?
The more money you can put down as a deposit – the better. A larger deposit means that the bank has to finance a smaller percentage of the purchase price of the home, which mitigates their risk. Another advantage is that bank reserve their best rates for applicants with large deposits, resulting in lower monthly repayments.
What is my employment situation?
Most lenders won’t want to provide finance to someone who is in their probationary period, so if you are thinking of changing jobs, rather stay put until after the application. Also, lenders view an extended length of employment favourably, only providing finance to an applicant who has had stable employment for some time. If you have recently changed jobs, rather wait three to six months before applying for a mortgage.
Lenders also view self-employed people as a higher risk, especially if the business is in its developing stages. Applicants who are self-employed will usually be required to provide their SA302 form relating to the last three years from HMRC, alternatively their full accounts for the last three years.
What can I afford?
Affording a home is more than just paying the monthly mortgage repayment, other costs need to be considered such as utilities, taxes, insurance and maintenance. “Owning a home is a long-term investment that needs to financially sustainable for the term of the loan, so it is advisable to purchase a property that you can comfortably afford,” says Peggy Su. “Financial preparation is the key to homeownership readiness and will make the mortgage application process far smoother,” she concludes.