Applying for a mortgage: the ins and outs

Buying a house is a momentous occasion in anyone’s life. Whether buying alone or with a partner, getting a mortgage and signing the deed is a huge commitment. But the security of owning your own home is something we all dream of having, and the earlier you can get on the property ladder, the better.

House prices in the UK are rising, meaning younger generations are struggling to find their way into the market. But, according to the latest Regulated Mortgage Survey Data by the Council of Mortgage Lenders, there are 42% more first-time buyers (25,100) on the market than there were at the same time last year. Additionally, the data also showed that first-time buyers made up 42% of all home loans in May. This is even higher than 2007, the year before the recession hit, when first-time buyers made up an average of 38% of all home loans. Do these recent figures mean the property market is finally opening up again to the younger generation?

The Government’s Help to Buy equity loan scheme, introduced on April 1, could be helping. This scheme assists borrowers who have small savings by giving them a deposit of 20% of the price of the property they want to buy. For example, if a buyer has saved a 10% deposit, then the Help to Buy assistance will allow them to apply for mortgages that need a 30% deposit. However, this loan is only available on new build homes worth up to £600,000 and buyers need to have saved a minimum of 5% of the property price. The benefit of the scheme is that with a higher deposit, mortgage rates are much lower, allowing people who may not have been able to afford it previously to get onto the property ladder.

Come 1 January 2014, an additional scheme, the Help to Buy mortgage guarantee, will be available to home buyers. The difference between the Help to Buy and the Help to Buy mortgage guarantee is that with the latter you can buy a new build or already existing home and you don’t have to be a first-time buyer.

Considering the average home price in July is now £253,658, home buyers (particularly first-timers) are going to need all the help they can get.

Regardless of whether or not you need assistance attaining a deposit, you’re still going to need to get a mortgage. It’s important to remember that every lender has slightly different criteria when deciding who they are happy to give a mortgage to. But, when it comes to approving a mortgage, lenders almost unanimously look for two things in particular – your credit rating and the size of your deposit. If you’ve got a good credit rating and a large deposit, then you’ll have more mortgage options in terms of interest rates, monthly repayment amounts and the actual size of mortgage that you can confidently take on.

A credit rating is everything. If you’ve missed a credit card repayment in the last few years or have fallen behind on your monthly mobile payments then lenders are very unlikely to grant you a loan. To them you will seem like a risk, because there’s a chance you could also default on a mortgage repayment. And in the current economic climate, that’s not a risk they’re willing to take. Maintaining a good credit rating will also ensure you always have financial options open to you, such as remortgaging your loan later down the track.

However, a bad credit rating can be improved. For example, being registered on the electoral role, ensuring your credit report is up to date, including a notice of correction against any credit problems in your report that were due to special circumstances, and closing any unused bank accounts can all help to improve your rating. 

But, there are other things aside from your credit rating and your deposit which may affect your eligibility for a mortgage.

If you’re planning to start a family, it’s wise to hold off until you’ve secured the loan. If you have children or are a non-earning partner, then lenders will reduce the amount that you can borrow simply because you’re considered to have higher outgoings than a person or couple with no children and who are both working full-time. Therefore, to the lender, you’re more of a ‘risk’.

Also, some lenders also look down on self-employed applicants. However, someone who has been running their own business for a number of years, and can show that their income meets the lender’s standards, shouldn’t have a problem. Also, you may have a better chance of securing a loan if you’re self-employed in the same industry that you were working in as an employee. But if you’ve recently been made redundant, then your chances of approval drop.

At this point, you may be wondering how anyone actually qualifies for a mortgage. But, while it can be hard to secure a loan, it’s important to know that mortgage discrimination is illegal. While lenders can have guidelines in place to protect themselves from lending to ‘risky’ borrowers, they can’t discriminate against you due to your gender, race, colour, religion, sexual orientation, marital status, family status or if you have a disability. It is illegal for a lender to discourage you from applying for a mortgage or reject your application because of any of these reasons. For the same reasons, it’s also illegal for a lender to offer you a higher interest rate or lower amount of money.

Now you’ve got a better idea of what’s required to get a mortgage, it’s time to start applying. Once your mortgage has been approved then it’s up to you to pay it back at an agreed monthly rate and on time. If you are at risk of falling behind on payments or your circumstances have changed and you can no longer afford the mortgage, then you need to seek advice immediately before your debt gets out of hand.

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