The Ultimate Step-by-Step Guide to Your First Mortgage.
Navigating the mortgage maze can seem daunting, especially for first-time buyers. The process, filled with unfamiliar jargon, complex calculations and a myriad of choices, can be quite overwhelming.
However, understanding the steps involved can simplify the mortgage process and provide a clear path to your first home. This first time buyer guide will walk you through each step of your first mortgage process, from getting your finances in order to buy your very first home.
1. Understanding your Financial Situation
Before embarking on your home buying journey, it’s crucial to assess your financial situation. Two key factors mortgage lenders will scrutinise are your credit score and your debt-to-income ratio.
Different lenders have different criteria for the type of clients they will accept. Some only want the lowest possible risk clients, others will take on clients with some history of credit blips. How do they determine this.
1.1 Importance of Credit Score
Your credit score is a numerical representation of your creditworthiness, based on your credit history. It’s the primary tool lenders use to evaluate your financial reliability. An optimal credit score can unlock favourable mortgage terms, including lower interest rates.
However the lenders dont look at your score as this is just an easy means of people to understand their credit rating. What the lenders actually look at are the details that make up your credit history and how recent they are. For example 2 missed credit card payments over the last 6 months is a lot more relevant to them than if this was say 5 years ago.
They look for the following:
- Missed unsecured loan payments (think personal loan, credit card,…)
- Missed secured loan payments – typically mortgages
- County Court Judgments
- Defaults – where you debts were over a period of time and you credit was marked as non paying.
What they are interested in:
- When did this occur
- How many incidents
- Is the account now back to normal or still in default
Consider signing up for free credit reporting services like CheckMyFile , Experian , or Equifax to name a few, to monitor your credit score. These are usually subscription services but often with a free first month. So clients sign up, get the report and then cancel the contract.
Getting a good credit score
Aim to make timely bill payments so wise to setup a direct debit plan, utilise credit cards moderately, and avoid frequent credit applications to maintain a healthy credit score.
Also keep you overally credit card utilisation low, ie below 50% for example. So if you have credit card limit of £6,000 then keep your running balance within 50% of it is a good guide. If a lender sees you are using up most of your limit then they might worry you are living beyond you means.
1.2 Debt-to-Income Ratio
Your debt-to-income ratio is the proportion of your income spent on debt repayments. Lenders employ this ratio to gauge your capacity to manage monthly mortgage payments alongside your existing financial obligations.
For example if you earn £30,000 and you have debts of £3,000 (10% Debt To Income) that would be a lot better than say £15,000 of debts (50% Debt to Income). Also lenders will factor any debts into you overall mortgage availability – step 2.
To improve this ratio, consider reducing major debts, curtailing unnecessary expenses, and avoiding large credit purchases prior to your mortgage application.
2. Determining Mortgage Affordability
With a clear understanding of your financial status, the next step is to ascertain how much you can comfortably borrow. Approaching lenders for pre-approval, consulting mortgage brokers, or using online mortgage comparison tools can provide a ballpark figure of your borrowing potential.
An Agreement in Principle (AIP) also called a Decision in Principle (DIP) can offer a more accurate estimate of your borrowing capacity. We would always recommend to get this prior to any house hunting.
Think of a AIP / DIP as a sort of ‘we would in theory’ lend you this amount from the lender. It is not a guarantee. It would always be subject to the property, validating your income and an assessment of your overall case which is called Underwriting.
3. Saving for Deposit and Other Costs
Most mortgage lenders require a minimum deposit of 5% of the property’s purchase price. However, a larger deposit could secure better mortgage deals and lower monthly repayments.
Consider strategies like regular savings, utilising a Lifetime ISA, or government schemes such as Help to Buy to bolster your deposit fund.
Also you can use money from others, usually direct family towards the deposit. This needs to be a gift of the money rather than a loan, otherwise the lender will reduce your mortgage amount by the potential cost of the loan.
In addition to the deposit, budget for other costs associated with home buying such as conveyancing fees, stamp duty, mortgage arrangement fees, moving costs, and initial furnishing and decorating expenses.
Step 4: Property Hunt
Armed with a realistic budget and pre-approval, you’re now ready to embark on the exciting phase of house hunting. Use property portals like Rightmove or Zoopla, or engage with estate agents to explore suitable properties within your budget.
Be prepared to compromise on some property features and remain patient throughout the process.
Top Tip: Remember this is your first home and it is unlikely to be the home of your dreams. Be realistic and get on the property ladder.
Step 5: Making an Offer
Once you’ve found your dream home, the next step is to make an offer. Conduct thorough research of the property market in your desired area, consider the length of time the property has been on the market, and be prepared for potential negotiations.
Be sure to state any terms and conditions in your offer, such as making it subject to a satisfactory home survey or mortgage approval.
Most estate agents would ask for your AIP / DIP document when putting in an offer as well as your proof of deposit to ensure you can afford the offer amount.
TOP TIP – if you are using a mortgage broker we would always recommend that instead of providing the DIP and deposit to the estate agent let you broker confirm that you could afford the purchase offer. Why? Well if you are looking to buy a £400,000 property and you have a £100,000 deposit and your DIP shows a maximum mortgage of £350,000 so a total potential of £450,000 you dont really want to hand this information to the estate agent who is after all an agent of the seller !!!
6. Step 6: Mortgage Application
Upon acceptance of your offer, it’s time to finalise your mortgage application.
Approach your chosen lender with all required documentation reflecting your income, assets, debts, and credit history. Alternatively a mortgage broker will collect this information, find you the most appropriate mortgage and do the application.
When a mortgage application is submitted it locks in the mortgage deal, so the deal wont change after this point.
7. Step 7: Initial Assessment & Valuation
Once your mortgage application is submitted, your lender will initiate loan processing. This initial stage has three steps.
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- Initial Assessment – the lender will check the application and documents and may ask for some further information. For example if you have just started a job they may want the Contract of Employment.
- Affordability – the lender will redo a credit check and affordability assessment to approve your mortgage application.
- Valuation – the lender will appoint a valuer to go to the property to determine the value and if a suitable property for security for a mortgage. (See blog on Hints and Tips on buying a Flat)
This involves ordering a credit report, verifying your employment and bank deposits, and commissioning an appraisal of the property. This stage may take 1 – 2 weeks depending on how busy lenders are.
8. Step 8: Underwriting Phase
Following the initial assessment, your mortgage application goes to an underwriter.
Underwriters are the key decision-makers who will double check all the information you provided and assess the risk of lending to you.
They will scrutinise your credit history, employment records, financial statements, and property details to either approve, reject, or approve with conditions your mortgage application.
9. Step 9: Mortgage Offer
If your mortgage application is approved, the lender will provide a Mortgage Offer. The Offer will confirm the mortgage deal and explains all the terms and conditions of the mortgage offer.
The Mortgage Offer is typically valid for 6 months. This means you have 6 months from the date of the offer to complete the purchase of the property.
10. Step 10: Completion and Moving In
The final step is completion. Here, your solicitor arranges the payment to the seller, and the property’s ownership is transferred to you. Upon completion, you can collect your keys, move into your new home, and begin your journey as a first-time homeowner! Congratulations !
We cover off the legal process in more detail in an upcoming blog.
First Time Buyer Mortgage Guide.
As a first time buer your first mortgage can be a daunting task. This guide should help you understanding the process and that it’s a manageable and rewarding journey. Just remember, patience and preparation are key to successfully navigating the first time buyer mortgage process.
In conclusion, getting a mortgage is a significant financial step. It requires careful planning, wise decision-making, and thorough understanding of the process. With this guide, you’re now equipped with the knowledge to confidently navigate your first mortgage process. Good luck with your home buying journey!
Compton Financial Services are on hand if you have any questions or would like our help on getting the right mortgage for you.
Your home is at risk if you fail to keep up payments on your mortgage or any other loans secured against it.
Compton Financial Services Ltd is an Appointed Representative of New Leaf Distribution Ltd. who are authorised and regulated by the Financial Conduct Authority. Number 460421. Head Office 165 – 167 High Street, Rayleigh, Essex SS6 7QA. Co registration Number 5520001.