Buying a house is an incredibly exciting experience, especially if it is your first. However, it can also be time-consuming and stressful.
This is particularly true when it comes to applying for a mortgage, which can be a long process. Researching and comparing your options, liaising with solicitors, not to mention the paperwork itself, can all take up valuable time and cause a great deal of confusion.
However, to take as much pain out of the process as possible, having one’s personal finances in order is of utmost importance.
While it is certainly not the only point of consideration, the state of your finances plays a large part in a lender’s decision to accept or reject your application.
So, what do first-time buyers need to consider and, more importantly, how can they ensure their personal finances are in order before applying for a mortgage?
Incomings and outgoings
First and foremost, it is vital a homebuyer understands how much he or she is realistically able to borrow, so a complete self-assessment of one’s finances will be necessary.
By taking stock of all your incomings and outgoings, you will get a clear idea of how much you will be able to repay on a monthly basis.
It’s also important to note that, when applying for a mortgage, you will need to show the prospective lender proof of income and certain expenditures, such as debt.
This typically includes payslips dating back six months or longer. Doing so provides mortgage lenders with a picture of an applicant’s finances, showing them whether or not they will be able to keep up with repayments, even if interest rates increase.
With this in mind, if you are considering moving jobs, it might be best to delay this change until after you have purchased the property, as it will be harder to reassure lenders that you have a constant stream of income.
Of course, it isn’t impossible to get a mortgage if you are between jobs, or in probation. However, it does mean you will have to conduct thorough research to find a lender who is more likely to consider your application.
Deposit size
It may seem like an obvious point, however the size of your deposit – the amount of money that goes towards to cost of the property you’re buying upfront – will impact both the amount you can borrow and the rates offered.
This is because it affects the loan to value (LTV) ratio, which is a term used by lenders that represents the ratio of a loan compared to the value of an asset purchased. In other words, it’s the proportion of a property’s value being borrowed.
For example, if you want to purchase a property worth £250,000, and pay a deposit of £25,000, the lender will need to provide the remaining £225,000 – at 90% of the total value of the property, this is the LTV.
The higher your deposit, the lower the LTV ratio will be. And the lower the LTV, the lower the risk incurred by the lender, which improves the chances of an application being successful – something which could result in better rates.
In light of this, it’s beneficial to develop a plan to start saving as early as possible, ensuring you build up as big a deposit as you can.
Indeed, it is often a good idea to set yourself a savings target to help you stay motivated. Such self-discipline may be challenging at first, but it will be incredibly satisfying when you reach your savings goal.
Credit score
Credit scores also play an important part in mortgage applications. They help lenders decide how likely you are to repay your debt. The higher your credit score, the more likely you are to be accepted for a mortgage.
That’s not to say that if you don’t have a perfect score, it’s impossible to get a mortgage. However, it may make the process a bit more difficult and it’s likely that some lenders will offer different rates or require a larger deposit.
Mortgage lenders often require proof that you are reliable when it comes to repaying debt, so you will need to demonstrate that you are capable of keeping up with payments.
An example of this is having a history of regularly paying bills or mobile phone contracts on time. Of course, there are no guarantees, but ensuring you have all your personal finances prepared for inspection could help to boost your credit score.
If in doubt, ask for help
Personal finances can be confusing – and applying for a mortgage certainly can be. But there is no reason why anyone should have to muddle through the maze alone.
If you’re worried about the state of your finances, or just want to make sure that they are in a suitable state, don’t be afraid to contact a financial adviser.
Whilst they charge for their services, they will be able to offer you tailored financial advice, in turn helping you to get your finances on track ahead of your mortgage application.
Alternatively, you could consult a mortgage broker, who can review the mortgages available to you based on your financial situation.
Again, they may charge (others are free as they earn commission directly from the lender), but they could save you time and stress by informing you which lenders are more likely to approve your application.
Brokers can even help you to improve your application and help you with the paperwork.
Ultimately, while mortgages can be complex, it’s important to remember that help is always on hand to ensure you find a mortgage that best suits your needs and circumstances.
John Ellmore, is director of Know Your Money, an independent financial comparison website, comparisons for a wide range of financial products, including mortgages.
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