Mortgages are the biggest financial commitments most people take on in their lives. Thanks to rampant inflation in the property market, buying homes is not cheap, particularly for first-time buyers climbing the first rung.
For this reason, obtaining a mortgage can be challenging. Eligibility criteria are stricter than they used to be, and lenders want to know every detail about your private life, including things like how much you spend on streaming subscriptions every month.
Fortunately, there are several strategies you can adopt for getting a mortgage. Here’s what you need to do:
Improve Your Credit Score
The first place to start is your credit score. The difference in mortgage rates for people with low and high ratings is much larger than you might expect. Those on the lower end of the spectrum could wind up paying interest rates well above 10 percent, perhaps even as high as 20 percent on some deals.
Credit rating agencies collect information about your credit score and then give this to lenders when they want to loan to you. They then use this information to decide how much interest they’ll charge. If it’s a low-risk deal, they’ll ask for less.
Therefore, you should start working on your credit score as soon as you can. The first step is to get a copy of your credit report. You can usually get this from your bank but if you can’t, you’ll want to approach one of the credit rating agencies, such as Equifax.
If your score is over 700, then you’re doing well. However, if it’s below this figure, you may struggle to get the best deals.
To improve your credit score:
- Ensure that the credit agency and bank have the same address for you
- Pay all your bills on time
- Don’t use more than 30 percent of your credit card limit
- Close down credit cards with short histories that you no longer use
- Ask to extend your credit limit but only if it won’t affect your credit score
With that said, bad credit mortgage deals are available. These tend to be lower cost compared to equivalent mainstream products.
Do Your Own Budgeting
Next, figure out how large of a mortgage you can realistically afford. In the past, lenders recommended keeping loan expenses to less than 28 percent of your pay. However, in more recent times, this has gone down to less than 25 percent because of rising food and utility costs.
When you have a spare afternoon, sit down with a pen and paper and figure out what you can realistically afford. Start off with your estimated gross income and then subtract all your household expenses. Start with mandatory expenses first, like tax and utilities, and then move on to discretionary items, like haircuts, days out, and streaming subscriptions.
Once you subtract all of this from your monthly income, you’ll see how much you have left over. Subtract some more money for items you may have missed or forgotten to get a rough estimate of your total expenses. Then use the remaining figure as a guideline for the average monthly cost you can support on your mortgage.
Stay In The Same Job
Mortgage lenders usually want to see that you’ve been working in the same company for a long time. That’s because they want to lend to people with secure incomes that don’t change from year to year.
If you’re planning on applying for a mortgage, it’s a good idea to stick around in the same job you’ve had for a while. Try to remain in the same place for at least three to six months before making the move.
The longer the income history you can provide with a particular employer, the better. To get the best deals, some lenders ask you to supply income data dating back three years.
Get Rid Of Your Debts
Another strategy is to get rid of your existing debts. When you apply for a mortgage, lenders will look at how much money you owe to other people overall to assess affordability. If you have a high income but are having to pay thousands in credit card debt every month, they may not offer you the best rates or the amount of money you need.
Before applying for a mortgage, get rid of the debts that you already have. Go to lenders with less than $1,000 outstanding across all your accounts. This way, when the lender does its affordability calculations, you’ll be able to borrow more.
Set Up Proof Of Income
Lenders don’t usually take your word for it when it comes to your income. Instead, they usually want to see some sort of proof.
The proof you provide depends on your employment status. If a company employs you, you’ll need employment form. These show your annual and monthly payments, and tax deducted.
Most lenders will require three to six months’ worth of P60s and payslips. You’ll also have to provide bank statements showing the money going into your account.
If you’re self-employed, the process is a little different. You might have to provide three years of tax returns and evidence that you have a stable income. If you can’t provide these details, they may not accept you for a mortgage.
Ramp Up Your Deposit
While there are 5 percent mortgages available, they don’t always offer the best interest rates. Furthermore, your application needs to be perfect. There shouldn’t be any blemishes on your record.
Of course, achieving such lofty financial heights is challenging for most people. That’s why it helps to make your deposit as large as possible.
If you can, try to save 15 per cent or more for the home you want. The higher the deposit percentage, the more deals will be available to you. Monthly payments will also be lower because the amount you need to borrow is less.
Don’t Change Your Application
Once you complete your mortgage application, keep all the figures final. Don’t chop and change them. If you do, it could cause the lender to reassess your application, causing delays and potentially putting up prices.
The house-buying process is a long one, so your circumstances may change considerably. However, stick with the existing data on the form, even if your financial circumstances improve. You can always inform the bank of a change in your circumstances at a later date.
Get Help
Searching the entire mortgage market for the best deals is a time-consuming and complicated process. Many lenders make their products difficult to understand and include hidden fees which they don’t tell you about upfront.
Therefore, it pays to get help from a mortgage broker. These professionals usually have access to the entire market and can present you with the best deal. They can research the market for you, looking for options that suit you. This way, you don’t have to become an expert yourself.
File A Joint Application
Filing by yourself is tricky. You have to pay the mortgage from your personal income and there is a risk that you might lose your job.
When you file a joint application, though, the risks the lender faces go down. Even if you lose your job, your partner probably won’t.
You also have more money to spend on the mortgage. Joint incomes are significantly higher than single ones.
Correct Errors On Your Credit Report
Correcting errors on your credit report is another proven strategy to help you get the mortgage you want. Problems with your file could drag down your credit score, causing lenders to reject your mortgage application.
If there is a problem with your credit report and it’s taking the ratings agency a while to update it, contact the lender directly. Show them proof of the error and ask them to reconsider your applications.
Remember, there are three credit rating agencies that lenders use so you’ll want to improve your standing with all of them. Write to them, telling them about the error and how they need to change it.
De-Link From Ex Partners
Ex-partners can drag down your credit score considerably. For instance, if you took out a credit card with one of your partners in the past, make sure that your name no longer appears on the account. Delete the account completely if you are in any doubt.
The same applies to old flatmates who used the same account as you for bills. De-link these from yourself quickly and your credit score should improve.
Don’t Apply For Any New Credit
Lastly, avoid the temptation to apply for new credit before your mortgage application. It could reduce your credit score and lead to rejection.
Most money experts recommend leaving at least six months between applying for more credit and asking for a mortgage. If you don’t do this, then lenders will worry about your ability to control your spending and you won’t get the best deals.
Remember not to apply for a “hard” credit check, as this will affect your score. Instead, use banking apps that keep a “soft” record of your score.
