Getting your finances in order before applying for a mortgage is one of the best things to do. Whether you are buying your first home or thinking of moving somewhere new, there are a number of ways that you can improve your situation and speed up the mortgage process.
Getting mortgage ready means that you will be better organised and in a much stronger position when applying for a mortgage.
Let us explain further.
What does mortgage ready mean?
Being mortgage ready is more than just deciding to buy a house and get a mortgage. It’s about sorting your finances and getting organised so that you stand the best possible chance of being approved.
Being short on time, and without some of the required documents, makes the whole process stressful for everyone involved.
So time is your friend!
Wherever possible, start the process 3-6 months before you want to actually apply for a mortgage. By planning ahead you will have enough time to understand what a lender will need to see and organise all of the necessary paperwork. When you start this process it might reveal things that need fixing or improving.
This all takes more time.
Think of it as getting match fit. You need to put the effort into training and getting prepared.
Having everything in order and in the right place will mean that:
- There’s less rushing around trying to find documents
- You will be in a stronger position than before
- You could have more deals to choose from
- It will be easier to apply for a mortgage
- It will be easier for a lender to assess your application
- You stand a better chance of getting what you want
25% of UK adults admit they have no idea when they would be ready to apply for a mortgage
A mortgage broker or lender can play an important role in helping consumers understand what is needed to be mortgage ready. This can subsequently help ensure an application progresses as efficiently as possible and in a timely manner. Specialist lenders also have a pivotal role in supporting prospective homeowners, particularly those who may think they can’t get on the property ladder.
Get yourself a mortgage broker
A mortgage broker’s job is to arrange mortgages.
But they are able to offer so much more.
In this scenario they can help you to get mortgage ready. Tell them about yourself, what you do, how much you earn etc.
And then tell them about the type of house you want to buy and the mortgage needed to do that.
Your broker will be able to see how well you ‘fit’ a lenders criteria for the mortgage that you need. They can then make practical suggestions and tips on how you can improve your situation and get better prepared.
Having this extra time is a luxury for a mortgage broker. But it allows them to get you in to the best possible shape, so you can walk away with the best deal.
And when you’re ready to apply, they can sort it all out for you.
Always use an independent mortgage broker, for the best advice and the widest range of lenders.
The mortgage application process
Our Guide to applying for a mortgage covers this process in more depth.
But, the typical steps are:
Decision in Principle
Ask your mortgage adviser whether a Decision in Principle, or DIP, would be a good idea. Most first time buyers will benefit from one. A DIP or AIP will provide some extra confidence in your ability to borrow the size of mortgage you need. What is a mortgage Decision in Principle?
Mortgage research
Now it’s time to find a deal that suits you and one you are eligible for. I wouldn’t try to do this yourself, there are thousands of mortgages available. Your mortgage broker will be able to find a few of the better ones for you to consider. Remember that an independent mortgage broker can search through the entire mortgage market, plus they have access to some exclusive ‘broker only’ deals.
Key features illustration (KFI)
Fancy name for your mortgage quote. A key features illustration will show you the exact cost, including fees, of a specific mortgage deal. They can be used to compare deals with each other. But you need to have one for the exact mortgage you wish to apply for, before committing yourself.
Apply for a mortgage
A lot of this can be done online now. Your mortgage broker will help and will have a list of documents and information that will be needed. You may decide to transfer your interest rate to the new house, this is called porting. This article explains how porting works.
Fees
There’s quite a few costs when buying a house. Make sure you understand how much all of the mortgage fees are, and when they need to be paid. The KFI will have the mortgage fees listed.
Underwriting
Once you have applied for a mortgage it gets sent for ‘underwriting‘. This is where the lender checks your information and assesses your credit situation. They will look at your credit report and calculate a credit score. You can read more about the process here.
Mortgage valuation
Your new property will need to be seen by the lenders surveyor, who will carry out a Mortgage Valuation. This is very basic and not the same as a survey, so you will most likely want to have a more detailed inspection done, for your own peace of mind.
Mortgage offer
Your mortgage offer is the official legal document from the lender, offering you a mortgage and listing all of the conditions etc. This is only produced once the underwriting and valuation phase is satisfactory.
Pre-completion credit checks
Many lenders will re-credit check you, just before your mortgage funds are released, ready for completion. So don’t apply for a mortgage and then sneakily try and apply for some extra credit or loans. It could spoil your chances.
Mortgage completion
Completion is the last part of the process and it’s when your mortgage starts and you become the owner of a new property. What does completion date mean when buying a house?
Your credit status
Your credit status is arguably one of the most important parts of applying for a mortgage.
Lender’s get to look at what credit and loans you have, and how you have managed these over the last six years.
Having late payments, defaults or other issues showing on your report will affect your ability to borrow. So it’s really important that you get this in to good shape.
Get a copy of your credit report
Most mortgage brokers will ask to see a copy of your credit report. Just to check what they are dealing with. The report will show all sorts of credit related information and you need to make sure that it is all correct. Any errors need to be fixed.
Payday loans
While not strictly bad credit, payday loans can affect your ability to get a mortgage. This is especially true if you have taken one out in the last 12 months.
Dealing with bad credit
If you have elements of bad credit on your report then this affects your ability to get a mortgage and may reduce the number of lenders available to you. Bad credit does not instill confidence in lenders, and some have a ‘no tolerance’ approach which means your mortgage will be declined. However, the good news is that brokers are experts at sorting out mortgages where you have some credit issues such as; arrears, defaults, CCJ, IVA etc. They can help find a competitive bad credit mortgage, where the lender is used to these situations.
What is Thin Credit?
Having Thin Credit means that your Credit Report is (mostly) empty. You haven’t got any credit, or applied for anything in the last six years. While this is sensible and virtuous, it means that lenders have no way of assessing how well you will cope with the mortgage payments. There’s no track record. It really helps your case if you can at least have a credit card that you use carefully each month, and pay it off in full when the bill arrives. Read more on this topic.
Electoral roll
One factor that can greatly impact your mortgage application and creditworthiness is your presence on the Electoral Roll. The Electoral Register, is a comprehensive record of eligible voters in the United Kingdom. Am I on the Electoral Register?
Your Credit Score
Each of the CRA’s will give you a credit score, and each of these will be slightly different. When you apply to a mortgage lender they will also formulate their own internal credit score, which they won’t share with you. Find out your score from each of the three main agencies to see how strong it is. Checking your own profile won’t affect your credit score.
Financial Associations
If you have previously applied for any type of credit with another person, the Credit Reference Agencies (CRA) will have ‘linked’ you to the other party. This is a Financial Association and will show on your credit report. If you are no longer with this person, or associated with them, then you need to contact the agencies and remove the ‘link’, as this could affect your credit rating. You can request a notice of disassociation from credit reference agencies such as Experian or Equifax. All of the joint accounts must be closed before this can be approved. If anything is still active, you won’t be able to disassociate yourself.
Joint applicants
If you will be applying for a mortgage with someone else, the lender will credit check both of you. Regardless of employment status and income. It’s important to make sure that they are also getting their finances into order, and that there’s no hidden gremlins on their credit report.
Understanding mortgages
By gathering some background information on how a mortgage works and what interest rate types there are, you will feel more comfortable discussing your mortgage choices.
Here’s the basics, with links to more indepth pages if needed.
Interest rates
Each lender offers a range of different interest rates, so borrowers have some choice. The interest rate dictates how much interest you are charged by the lender every month/year.
When applying for a mortgage you will need to choose a specific deal. ie A 2 year fixed rate at 5%.
The main types of interest rate are:
Variable rate – Variable interest rates will fluctuate up and down and are influenced by the Bank of England rate. Read more.
Tracker rate – Tracker rates will also change up or down but only move as the Bank of England rate changes. Read more.
Fixed rate – A fixed rate stays the same for a set period. One, two five years etc. So whether other rates go up or down, your fixed rate remains unchanged. Read more.
repayment methods
Unfortunately, you will need to pay back the amount you borrow. ‘How’ you do this is called a repayment method.
There are three possibilities:
Repayment – This is the most popular. Your monthly payments will comprise of the lender’s interest and an amount of capital repayment. Each month your mortgage balance slowly reduces, until eventually it is fully repaid. Read more.
Interest only – With this option you will only pay the lender’s interest each month. This makes the payments much cheaper than a repayment mortgage but your debt never reduces. These are a bit harder to obtain and you will need to convince the lender of your ability to repay it. Read more.
Part and part – This is a mixture of repayment and interest only. So only part of the mortgage is being repaid each month, and there will be a lump sum needed at the end. Read more.
mortgage term
Your mortgage term in the number of years that you want your mortgage to be repaid over.
There’s no set length of term. Traditionally, many borrowers opted for a 25 year term. So if you had a repayment mortgage, it would be fully paid off at the end of 25 years.
As property is getting more expensive, a good number of borrowers are now choosing 30 years, or even 35 years, at least initially.
The monthly payments get cheaper as you extend the term (repayment mortgage only), so the mortgage is then more affordable.
legal charge
Mortgages are a type of secured loan.
The mortgage lender will want to put a legal charge on your new property, this will be their security if you can’t repay the loan.
Because of this the lender will want a surveyor to visit the property and check that it is worth what you are paying. Read more.
The legal charge will be noted at the Land Registry, who hold information about the owners of property and land.
If for some reason you are unable to keep up the repayments, then the lender has the right to repossess and sell your house to repay their debt.
Mortgage affordability
You need to be realistic about how much you can borrow, and how much you can afford to pay each month, before you choose a property.
What you think is achievable may differ to what the lenders think.
You can use some of our mortgage calculators to give you a ballpark figure for how much you could borrow, and then calculate the mortgage repayments.
This is a good place to start but it won’t tell you what deals you are eligible for, based on your income and credit score etc.
For that you will need a mortgage broker
When you apply to a lender they will carry out their own affordability assessment. This will take into account your annual gross income (before tax) and whether you are applying jointly with someone else.
But to assess affordability properly they need to see your bank statements. Lenders need to see bank statements to look at your regular income payments and then how you spend your money, and what you spend it on.
If you feel that this part might be a bit borderline, or that there’s potentially a few ticking time bombs, ask your broker to take a look.
You will find more useful information in our article: “How much does the average mortgage cost?“
Deposits
You will need to save up a cash sum to put towards buying your new home, this is your deposit. You can’t allocate this to pay for stamp duty or legal fees, and the mortgage deposit needs to be agreed by your lender.
There’s a good number of lenders offering 95% mortgages, where you pay 5% (cash) towards the cost of the house. If you can save a 10% deposit (or more) then this will open up the number of possible deals to choose from.
Your deposit directly affects the loan to value percentage. The higher your deposit, the lower the LTV.
Mortgage deposit
Your mortgage deposit is the amount you are contributing towards the property price, with the mortgage making up the difference. The mortgage deposit influences the loan to value (LTV) percentage.
exchange deposit
An exchange deposit needs to be paid to your solicitor upon exchange of contracts, which is one step before legal completion. This is often 10% of the purchase price.
What’s the difference between a mortgage deposit and an exchange deposit?
Having a reliable income
Whether you are employed, self-employed, a business owner or a mixture of these, your new lender needs to see evidence that you can afford the mortgage repayments.
Wherever possible, try not to change jobs in the six months prior to applying for a new mortgage. Lenders like stability, so a decent period with one employer will be in your favour.
If you are employed then you will most likely receive the same amount each month, and maybe this is topped up with overtime or bonuses. If you are due a bonus then it could be helpful to wait until this has been paid. Always keep evidence of your income. This could be payslips, P60 and tax returns. Ideally this should be paid into your own bank account for at least the last 6-12 months.
Ideally you should be able to provide the lender with three years of finalised accounts. Don’t worry if this is not possible, as solutions are available with only 2 years accounts.
Self-employed individuals need to keep their tax returns, self-assessment paperwork, personal accounts and maybe CIS payslips. If you are a company director then lenders will also need to see business accounts and bank statements.
Get your paperwork in order
The exact documents needed will change slightly according to each person’s situation.
The main documents needed are:
- Driving licence
- Passport
- Utility bills
- Last three/six payslips
- Most recent P60
- Company accounts
- Self-assessment returns
- SA302
- CIS vouchers
- Bank statements
- Proof of deposit
Make sure you have consecutive documents for your payslips, CIS vouchers and bank statements. This is all part of getting mortgage ready and having time to get things in order.
Your solicitor and lender will need to see proof of where your savings are for the deposit. This needs to be in a bank account (as few as possible), and they like to see a balance gradually increasing as you save towards moving.
Outstanding loans and credit
The lender will take a keen interest in any loans or credit agreements that you already have. These will show up on any credit checks.
Strangely, student loans don’t show up on a credit search. If you have one then it needs to be declared on the application. Student loans shouldn’t affect your mortgage application much, but if you have started making repayments these will be included in any affordability assessments.
And they will show up on your payslips.
If you do have regular credit/loan payments then make sure they are in proportion to your earnings. Lenders work out a debt to income ratio (DTI), which calculates the percentage of your credit payments against income. So having a car on finance will affect the mortgage affordability figures, as it’s a regular credit payment. An overdraft will affect your application if it is regularly used. However, if you are always in credit then this will go in your favour.
And please, do not take out any new payday loans.
Cut out all unnecessary borrowing and avoid opening any new accounts or cards.
Always make these payments on time and keep well within any credit limits.
It’s a good idea to keep older, well managed, credit accounts open. But accounts that are inactive should be closed down and cancelled. This reduces the amount of credit that you have access to.
Applying For A Mortgage
We explain what happens at each step, including what documents are needed and how a broker can help.
Key Takeaways
We’ve covered a lot of ground and it’s understandable if you feel a bit overwhelmed.
The important thing to remember is to start this process early, and work through the recommendations one by one. There’s lots of additional information available online, and we have many more articles and guides that can help.
It is never too early to approach a mortgage adviser for help. The earlier the better actually.
Then you can go from being mortgage ready to being mortgage fit!
Ready to explore your options?
If you’re just about to start your mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
An independent mortgage broker can access over 100 lenders on your behalf. They will make the process smoother and more profitable than going it alone.
Keep reading, keep asking questions. The more you know, the better decisions you can make.
