Taking out a mortgage is one of life’s biggest decisions and not a shout to be taken lightly or something that should be rushed. It is also a significant financial commitment, and contrary to popular belief, isn’t suitable for everyone. Indeed, prior to making such a decision, you should make sure that getting a mortgage is the right choice for your budget and income.
Knowing how to make the mortgage application process easier, as well as examining your other options, will make the whole journey easier and, potentially, more financially beneficial. If you’re wondering if a mortgage is the right choice for you, then here is everything you need to know in 2022.
Finding A Mortgage Lender
If you are ready to apply for a mortgage, you should shop around for the best lenders in terms of suitability with your current credit score. In simple terms, if your credit score is high, you will have a larger selection of lenders to choose from.
That said, do not immediately panic if you get rejected despite your having a high credit score, as other things can affect it, such as the number of loans you have applied for within the last year, and even being linked to someone with a poor credit score (like an ex-partner who you shared an account with). In fact, three credit reference agencies, Equifax, Experian and TransUnion, hold financial information on your associates.
All hope is not lost even if you do currently suffer from bad credit, as providers exist who can help facilitate a bad credit mortgage, increasing your chances of being accepted.
Understanding Your Credit Score
As we mentioned, your credit score has a significant impact on your mortgage decision, so you should understand how it works and how you can improve it. Download a free credit checker, such as Credit Karma or Experian, as these can provide you with further information on your credit score, as well as being able to see your credit history, and even suggestions on how to improve it.
Each credit company has a slightly different idea of what a good score is, so do not be too downtrodden if one agency suggests you have a lower score than another agency.
You can always use a few different apps and see how your score lines up. Your credit score and report are what a mortgage lender will see when they process your application, so you want to make sure it looks good, as part of the decision process will hinge on this.
Read: The IDEAL guide to getting to grips with your credit score
Start Reducing Your Debts
If you’re still keen on applying for a mortgage, the first thing you should look at doing is reducing any debts that you have. Potential lenders are less likely to accept you if you have lots of money on credit cards and loans that are being repaid. Generally speaking, if you’re using any more than a third of your credit limit (say, more than £1000 of a credit card with a maximum limit of £3000), then lenders may well view this as a red flag.
Missed direct debits, defaults, and bounced cheques will all tell a similar story.
Look at paying off anything you can to improve the impression of you being a financially literate and responsible person; even paying down phone contracts or higher purchase agreements can help. It might be worth waiting until you are near the end of these agreements before applying for a mortgage.
If you own a car on an agreement, it may be worth trying to sell your car and getting a cheaper one that is not on finance. Paying big purchases off early can look good to lenders but paying off too early means you skip some of the interest, which could put some lenders off.
Calculate Your Living Costs
There is no use applying for a mortgage if you are not going to be able to make the repayments (plus interest), along with all your other living costs.
Creating a budget will help you figure out what kind of mortgage is within your budget, how long you will need to borrow for, and how much you can pay each month. Factor in the costs of fuel, transport, subscriptions, energy and water bills, council tax, food, and anything else you usually spend money on. If you have never owned a home, sit down with a friend or relative and go through their usual payments to give you a rough idea.
It can be helpful to print out your last 6 months’ worth of bank statements and go through them. Look at what costs are necessary to live, and what costs could be cut down. You may want to limit the amount you buy takeaway or cancel your phone contract and get a pay-as-you-go deal.
Don’t Switch Jobs
Starting a new job right before applying for a mortgage is not recommended, as some lenders will not accept you during a probationary period in your working contract. Most probationary periods last between 3 and 6 months depending on the employer. Even if your new job is higher paid, this will not necessarily have a positive impact on your application, unless you have been there for a substantial amount of time.
Lenders usually go off your last 3 or 6 months income rather than your expected income. If you do have a new job on the horizon, hold off on your mortgage application until things have settled. However exciting it may be to apply, you do not want to increase your chances of being rejected.
Get On The Electoral Register
Because if you’re not on it, you have absolutely now chance of getting a mortgage, even if your credit is in tip top shape.
Don’t worry, you don’t actually have to vote (though, with the mess the country is currently in, you probably should), but being on the electoral register simply demonstrates that you’re actually who you say you are. Fraud and money laundering are such big concerns for lenders that they use the electoral roll to perform identity checks. If you’re not on it, you can register on the electoral role for free.
Getting Your Documents Ready
When you apply for a mortgage, you will be asked to provide proof of income. This is usually a P60, so ask your employer for one if you do not have one already. Sometimes this can take time to get, so doing it beforehand will ensure your documents are ready when it comes to the application stage.
Many lenders also ask for bank statements, so you should start cutting down on unnecessary spending, as this can impact their decision. If you are never left with any money after payday, they are less likely to accept you. Start a savings account, too, and try to save as much as you can into it every month. This will help with the deposit payment, too.
Read: Saving money for a house deposit
For the self-employed, lenders will ask for an SA302 form. This relates to your last 3 years of trade as a self-employed individual. They may also ask for copies of your full accounts. Starting a business right before getting a mortgage is not a clever idea, as most lenders want to see a few years of growth and profit to consider lending.
Alternatives To Mortgages
Getting a mortgage is perhaps the easiest and safest option when it comes to buying a home, but there are alternatives available for those who want to know all options.
One way is to borrow from another provider or a family member or friend. If you decide to go down this road, make sure that you write up a formal agreement that can be signed by a lawyer. The last thing you want is money coming between you and your family members.
Some homes and flats have a rent-to-own, or shared ownership, scheme. This allows you to buy a share of a property (usually between 10% and 75%) and pay rent on the remaining share. You can then increase your share gradually, which is known as staircasing.
You may also find that you’re able to utilise the UK government’s Help to Buy scheme, which in some cases can allow you to buy a property that is worth more, even if you don’t have enough of a deposit already saved up.
The Bottom Line
Mortgages are an excellent choice for those who want to get on the property ladder but do not have the cash to purchase a property outright. You can still get a mortgage if you have bad credit, but you should still look at improving your credit score for the future. If you need more help, speak to a mortgage broker or a financial advisor.