How do mortgage applications work?
According to a 2016 Which? survey, 7 out of 10 people who either bought or sold a home reported finding it a ‘nerve-wracking’ experience. Considering the fact that a house is likely to be the most expensive purchase most of us will ever make, it’s perhaps not a surprise that it can cause some anxiety. While it is true that applying for a mortgage can be complex, there are simple steps you can follow to make sure you understand the process and are well prepared. Below, we look at how applying for a mortgage works and what you might need to think about.
What is the process of applying for a mortgage?
There are a few different phases you have to go through in the process of buying a home, before you actually apply for a mortgage. Firstly, it is usually a good idea to make sure you understand the different types of mortgage available and how interest on them is calculated. You can then start to figure out how much you can borrow, based on your savings and income, using affordability tools.
You can also get financial advice from third parties, such as mortgage brokers, who will search the mortgage market for a deal that is suited to your particular situation. Speaking to a broker can be useful because as well as getting access to their expertise, you can also save time on research and get their help with filling out paperwork. Some brokers may charge a fee for their services, or will sometimes charge lenders commission instead. You should always check that your broker is on the Financial Services Register, to ensure that they are properly authorised.
You can also speak directly to a bank or building society about what types of mortgage they would be able to offer you. They will ask some basic information about your earnings and credit history and will try to find out what sort of mortgage product will be suitable for you. You might then be able to get a ‘mortgage in principle’, which indicates that they would be willing to lend to you, should you fulfil all their requirements.
The next important step is then to actually find a property that is suitable for you and within the budget you have set out, this might include getting a survey, which will evaluate the condition of the house you wish to buy.
Once you’ve found the right house and want to go ahead with the purchase, you would go back to the lender and begin the actual mortgage application. This will involve detailed research into your financial situation, including earnings, expenditure and a full credit check with a credit reference agency. You’ll need to supply certain documents as proof of your income and outgoings, so that banks have an idea of how well you would be able to cope if the size of your repayments increases in the future. Before you get a final decision, the lender will most likely insist on a valuation of the property, to ensure it matches how much they are lending you.
What is the difference between advisor and execution-only mortgages?
Execution-only mortgages are when an individual takes out a mortgage without any help from a financial advisor or a mortgage broker. Because they are making the decision by themselves without independent advice, they will likely have to agree in writing that they are aware of this and any potential consequences if the mortgage turns out to be unsuitable. Because mortgages can be complex, lenders want to be sure that the people they lend money to are fully aware of the risks and responsibilities.
What is a ‘mortgage in principle’?
A mortgage in principle (also called ‘mortgage application in principle’ or ‘mortgage decision in principle’) is a statement from a lender that says they will lend you a specific amount based on the information you have provided. It is not a guarantee, but an indication that they would be willing to lend you the money ‘in principle’. It can be used to show estate agents or sellers that you do in fact have the funds to buy a property, but it is also likely to leave a ‘footprint’ on your credit report, which can affect your credit score.
What documents do you need when applying for a mortgage?
You’ll need quite a few documents before you apply for a mortgage, so if you’re planning ahead, it’s a good idea to start gathering important paperwork and getting it organised now, to make the process faster when it comes to actually applying.
Banks and building societies want to see proof of your income and outgoings, so you will need to provide related documents, including at least three months of payslips, your most recent P60, up to six months of bank statements, as well as details of any other earnings such as benefits or investments. If you’re self-employed, you’ll need to provide a tax return and accounts from the last few years.
You’ll likely also need proof of identity and proof of address, such as a passport, driving licence or utility bills. What is required will vary between lenders, and may also vary depending on your personal circumstances, e.g. not being a UK citizen. However, the above collection of documents should be a good starting point.
What can you do if your mortgage application is refused?
If your mortgage application is declined, there may be a few different reasons the lender has made this decision. Firstly, it might be a good idea to check that all the information you provided is correct, it’s not impossible for either a borrower or a lender to make a mistake, so review everything carefully.
If you are not earning enough, or you are spending too much, the lender might have decided that you would not be able to afford your repayments. In this case, it might be wise to rethink the size of the mortgage you are able to get and to also think about how to better budget your spending. It is also possible to get something called a ‘guarantor mortgage’, this is when another person, usually a relative or close friend, agrees to accept responsibility for the debt, in the event that you are unable to keep up repayments.
One potential barrier for getting a mortgage can be your credit history, particularly if you have a history of missed payments, defaults or insolvency. Checking your credit report thoroughly before you even apply can help ensure you are aware of any errors or problems that might concern a lender. If you do have issues, you can find more information in this article on helping improve your credit history.
If you are interested in checking details of your credit history and getting an indication of how creditworthy a lender may find you, you can get online access to your credit report with your Equifax Credit Report & Score. It's free for 30 days and £7.95 a month thereafter
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