I’ve been through some basics of getting mortgage advice in my first post in the series here. Now, I thought it’d be useful to talk you through each of the steps advisors and underwriters consider in approving an application.
Before you start looking around at that dream home, please, please get your mortgage arranged. It puts you in a better position when negotiating, makes the process run more smoothly, means you needn’t deal with estate agents haranguing you and, most importantly, you needn’t be crushed when you find ‘the one’ only to then discover that you can’t get a mortgage for it. No-one likes to destroy dreams, so get the dull stuff sorted first, and then you can have the fun* of choosing a new home.
A mortgage application is split into two key areas – you and the property. Underwriters need to consider both equally, but it’ll always be the ‘you’ part to look at first – the property can change, you can’t!
‘You’ is broken down into a few key areas, all designed to help the underwriters decide whether you’re a good risk to loan a large sum of cash to. They need to be reasonably confident that you are both ‘willing’ and ‘able’ to meet your monthly payments. That may seem an odd distinction, but there is a distinction. Take the couple who earn £80k between them, are in good, steady jobs, but their bank accounts show them going repeatedly overdrawn (and by that I mean over their overdraft – operating within an agreed one is fine, but going over it does not look good on an application), pay their mortgage late once or twice a year and they miss the odd credit card payment. Their current mortgage is £150k and they now want one for £250k – how does that look to you? They may be ‘able’, but they’re not looking all that ‘willing’! But then we have the young first time buyers who have saved and saved for their deposit, paid every bill on time, and have now found the house that they want but it’s 5 times their joint income. They definitely look ‘willing’, but unfortunately, just not ‘able’.
Lenders will need to look at how you’ve previously managed your credit cards, loans, rents and mortgages (if you’re thinking of buying for the first time and have no debts, it does help your credit rating to actually have a credit card, providing you pay it every month, of course!), where you’ve lived (make sure you register on the electoral roll at every address as gaps in this history don’t look great), your bank account (please always stay in that agreed overdraft limit!), and your employment/income. This last one is straightforward if you have a basic salary that you’re paid regularly, have been in that employment for over a year, and are under no notice of redundancy/termination. Unfortunately, not everyone fits into that category.
Now, the thing to remember here (which I do realise makes it a little tricky ), is that every lender will have it’s own lending policy. So, how they work out your ‘admissible income’ will vary, and once they’ve worked it out, how many times they multiply it by will vary, too. As a rule of thumb, to do anything more than 2.5-3 times your income is not a sensible move. Commissions, bonuses, overtime and so on, tend to be taken by looking at averages and perhaps then taking a third to a half. As the person taking on this debt, I’d say aside from what your lender is saying they’ll take into account and what they’re willing to lend you, you’re the one paying it back so be realistic and don’t over stretch yourself. If you’re still in a probationary period, it’s best to wait until you’re made permanent before applying (though this does tend to be less of an issue for professionals such as teachers, nurses etc.).
If you’re self employed, it’s usually an average of your net profits over at least the last 2 years. And your net profits should be steady or increasing over that period. If this suits you, then you can apply for a mortgage in the normal way. I know that often accountants do their best to minimise your net profits for tax purposes, but this is the exact opposite of what you need here, so bear that in mind. There are also usually 1-2 lenders that will look at 1 years accounts, with a projection, though you’ll have to shop around. If, however, your income has not been certified by accountants, is more irregular, you’ve not been trading for 2 years, it is definitely much harder now that ‘self-certification’ mortgages have gone my the wayside. It does help if you’ve moved into self employed in the same industry as you may have been previously employed in. Also a good track record with your current mortgage works in your favour. If you do not fit the ‘norm’ with your self employed income, you would be best to seek a lender that will review your application as an underwriter, rather than just hit a button and get a ‘computer says no’ type response, but as your income immediately looks ‘risky’, everything else on your application needs to be strong, such as the things I’ve mentioned above.
A Few Extra Points:
First Time Buyers – Where’s your deposit coming from? It looks much better if you’ve saved some yourself, rather than it all being a gift, as it shows you can budget and manage money. You need to show this and have good credit records. Unfortunately, from a risk point of view, couples that have never lived together before and are buying their first home are not looking good, as they’re the most likely group to split and renege on mortgage payments (I’m so taking the romance out of it all, aren’t I?!) Don’t take it personally, it’s just how it is – my husband and I were exactly this risk as first time buyers ourselves, and we’re still on that property ladder and together, so I haven’t taken offence! But what Im saying is, you’re a risk so get the other areas on your application looking strong to mitigate against it and it won’t be an issue.
Transfers of Equity – this is an increasingly common one I saw needing review, unfortunately. Typically, it was due to a marital split, and one of the parties wanted removing from the mortgage. This is still an application, and is not automatically granted, solicitor or otherwise. To remove one party, the remaining person needs to demonstrate an ability and willingness to pay the mortgage themselves. It may be decided that it’s best for both people to keep the mortgage in joint names, though ‘best’ financially and ‘best’ emotionally are obviously two separate things.
Credit Scores – if you’re in any doubt about yours, get hold of a copy and go through it, with your lender if appropriate. CCJ’s do come off after 6 years.
Responsible lending is something we’ve all been going on about for some time, especially after the credit crunch. Personally, I think ‘responsible borrowing’ should also be talked about more. Desperate for that house move, please do be honest with both the lender and yourself about what you can reasonably afford.
I’ll tell you about the property part of the application next time. And do feel free to ask me questions or request subjects for posts – happy to help out.
*fun or hell. I’ve seen both – you know where you sit on this one..