Getting on the property ladder is considered a goal for most people in the UK and undoubtedly one of the biggest financial decisions a person will make in their life. The advantages of home ownership typically include the home increasing in value and more predictable costs than paying rent.
A mortgage on a property is essentially like getting a very big loan from a bank. It typically requires you to put down a deposit but the bank is actually paying 60% to 100% of the loan upfront to help you with the purchase. Therefore, banks and lenders have quite strict criteria in place when considering mortgage applications, which is why around 30% of mortgage applications are declined.
However, there are some things you can do to give yourself the best chance of being accepted for a mortgage, which we discuss below:
Save Up with A Bigger Deposit
For those with larger deposits, the mortgage provider essentially has to lend out less so it can make the application more attractive to the mortgage provider and even secure better rates. For example, a buyer with a deposit of 25% of the purchase price is likely to be more attractive to the mortgage provider than a buyer with a 10% deposit.
So, with higher deposits, the bank or lender is lending out less and may therefore take on more risk or people to lend to. The best mortgage deals on the market are reserved for buyers who are willing to put down a higher deposit, so you can benefit from better rates too.
Have A Good Credit History
To apply for a mortgage, you will find the process a lot smoother if you have a good credit score. Having a bad credit score can actually stop you from being able to obtain a home loan at all, and having a good credit score can help you qualify for the best deals on the market for mortgages. You can read our tips on how to improve your credit rating.
It is very important to know what your credit score is in order to avoid any surprises. You can order a one-off copy of your credit report for £2 from the likes of Experian and CallCredit although many credit reference agencies now let you see your credit report for free. You have time this way to correct any inaccuracies if you find any that might damage your chances of getting a top deal.
As a young person looking for your first mortgage, it may be a little harder to demonstrate a good credit score. You instantly start with a score of zero when you turn 18. It can be useful to take out some other types of finance like credit builder credit cards, to get used to paying small amounts and demonstrating your creditworthiness. Even car finance, to show that you can make monthly repayments on time is a useful way to build up your credit score.
Other essentials include joining the electoral roll as most companies use this to verify your identity and current address, even if this is living with your parents. It is vital to maintain a good credit score to qualify for the best mortgage deals.
Reviewing Who You Apply with
If you are applying for a mortgage with a spouse or sibling, their credit rating will be considered too. Making a joint application with someone with a bad credit history can be detrimental to your chances of being approved. In which case, you will need to assess your options.
Similarly, when applying, you may need to remove yourself from any joint accounts that you have with another person who could potentially have bad credit. This is because any late payments made by that person can reflect badly on you as you are viewed as being financially linked to that person.
Paying Off Unsecured Debt and Closing Accounts
One of the things mortgage providers look at during the mortgage application process is the total amount of credit available to you. In addition to this, they will look at the amount you owe or that is considered debt outstanding. This is because if you have 10 credit card accounts open, even if you do not use them this implies you potentially have the ability to borrow considerable sums of money, which could lead to financial difficulties when paying off your mortgage. Also, if you are someone who relies on having several loans outstanding at any time, this could perceive you as being a more risky person to lend to.
To make sure you get the best deal, clear any potential outstanding loans that you do not need or at least repay as much debt as possible. As well as this, close any accounts which are no longer in use such as store cards or credit cards that you have not used in a long time. Otherwise, you may find that mortgage providers have concerns about your ability to be able to keep up with and pay your required repayment amounts.
Be Prepared with Your Documents
Mortgage lenders usually always need to see legal documents prior to approval. Make sure you have an up-to-date passport and that the address provided on this and your driving licence is correct. You will need as a minimum these valid forms of ID when applying for a mortgage.
The other documents that you will be required to provide include a recent letter that confirms proof of address. This letter could be in the form of a bank statement or a utility bill – it simply needs to be recent and confirm your address.
People who are employed will also have to provide recent bank statements and payslips for proof of income. These statements need to be from the last three months, and if you have received any form of self-employed earnings or a bonus, you should show evidence of these as well to improve your chances of getting a mortgage.
In addition, if you have any other form of income, such as Child Benefit, you should also provide the details of this and show the appropriate documents.
Provide Evidence of Self-Employed Earnings
As mentioned, you should disclose all of your self-employed earnings. Being self-employed is now very common but there are several lenders that do not accept applications from self-employed individuals.
Therefore, you must be prepared to provide more evidence of your self-employed earnings than someone who is employed full time. You need to be able to demonstrate that your self-employed role is similar to that of a full time job paying the same as if you were employed.
Usually, if you are self-employed you will need a SA302 from which relates to the last three years from HMRC, if this is possible. Failing this, you will need to provide your accounts for the last three years.
How Short Term Credit May Affect Your Chances of Approval
Research has shown that applying with a payday lender or short term lender like Uncle Buck, may impact your chances of being approved for a mortgage. The reality is most lenders are required to share data with credit reference agencies which can include payment performance information and other lenders may therefore see evidence of payday lending or short term lending on your credit file. Each lender looks at information differently and this may influence a mortgage application decision but there would also be a number of other factors to consider such as how long ago you took out the short term loans and whether you repaid them on time.