More and more people are facing financial anxiety due to the cost of living crisis and the changes in Government. This has made some people unsure about their eligibility for mortgage borrowing when house buying. Let’s take a look at how you can get your finances in order and better prepare for applying for a mortgage? Im Len Der III and I am an expert in all things mortgage related.
After a year of new prime ministers, a mini-budget, and a cost of living crisis in full flow, many people are feeling anxious about their finances. House buying might seem like a far off dream. Throughout the duration of the pandemic, this uncertainty has made mortgage borrowing more difficult for many. In fact the whole understanding of mortgages and some of the new rules that have been introduced recently is having an impact on many.
A Moving Buddies mortgage advisor will give you advice on affordability when house buying, what amount you are likely to get and if there are any potential problems in your finances that you might need to address.
How Do I Qualify For A Mortgage?The Process of buying a house depends largely on your finances. There is no one single thing you can do that will ensure your eligibility to borrow but during the process of buying a house, you’ll definitely need to ensure your finances are in order before speaking to a lender. Below we outline the fundamental things you can do to boost your chances when it comes to applying for a mortgage. Take a look here to see the process of buying a house and how we can help you.
Register To VoteThis is one of the ways that lenders verify your identity and address. If you are not already on it, register on the electoral roll online. Also make sure you’re not still registered at a previous address.
Save A DepositThe bigger your deposit the better mortgage rate you could get. You’ll also have more choice when it comes to mortgage deals. A deposit of 5% of the property price is usually the minimum you’ll need, but it is more likely to be 10% or more.
Consider Your Credit History
You must demonstrate you will be a responsible borrower and not stretching yourself too thin.
So you should:
- Pay debts on time
- Pay all bills on time
- Close old, inactive accounts
- Do Not apply for additional credit, definitely not payday loans
- Avoid using or going over your overdraft
- Close any out-of-date joint current accounts that you hold with another person in case they weren’t responsible with their money. If you’re still linked to them, their bad credit record can negatively impact yours
Records remain on your credit file for around 6 years. Bear in mind that since 2011, any payday loans you’ve taken out will be listed on your credit file – even if you paid them off on time. They make lenders think you can’t cope with having a mortgage.
Maintain Job StabilityIt’s not a good idea to look to change jobs too close to house buying. Most lenders will feel more comfortable lending you money if you have been in your job for at the very least 3 to 6 months.
Check Your Credit RecordCredit reports provide an insight into your payment behaviours and lenders use them in their decision-making process. Check your credit record and correct any errors that you come across. You won’t know what lending criteria lenders will score you against since these are not publicly available but each lender will probably have a different way to score customers and if one doesn’t want to lend to you, it doesn’t mean that all won’t. There are 3 main credit reference agencies in the UK whose reports lenders will have access to: Experian, Equifax or Callcredit/Noddle. All three agencies are required to provide you with your credit report for £2, and you can access this online or by asking for a written copy. You may be able to register for a free trial with these companies and see your file for no extra cost. Just cancel before the trial period is up or you might get billed.
Collect Financial Documents
Lenders need a good picture of your financial situation and will typically ask you for the following:
- Proof of income / at least 3 months’ payslips
- Last 3 months’ bank statements
- Proof of current UK address (eg: council tax bill or a utility bill from the last 3 months)
- Proof of bonuses/commission
- Your latest P60
- Your last 3 years’ accounts or tax returns if you’re self-employed
- Your Self Assessment tax return if you’re self-employed
- Proof of deposits (e.g. savings account statements)
- Proof of ID (passport or photocard driving license)
- A gift letter if you’re getting help with your deposit
Know Your Spending HabitsMortgage lenders will need to understand your spending habits so they can recommend an appropriate mortgage for you. In order to do this, you’ll have an interview that could take anywhere between 1 and 3 hours. Although this happens later in the process of buying a house, you should familiarise yourself with the things you’ll be asked about. These include:
- Essential expenses, like food, utility bills, petrol etc
- Basic quality of living costs, like clothes, holidays, household goods and childcare
- Repayments and other commitments
No More Stress Test
The Bank of England recently removed the required stress test for people applying for a mortgage. What does this mean for the mortgage application process?
This isn’t the only action the Government has recently taken that will affect house buying; they also increased interest rates six times since December to try and combat inflation. They most recently hiked up the base rate by 50 basis points to 1.75%.
It appears that mortgage rates will return to 4-5% in 2023. But anyone looking to buy a home will never experience the days of ultra cheap property.
Mortgages And The Self Employed
It’s a common myth that those who are self-employed won’t be approved for a mortgage: Around a third of Brits believe they may not be able to get a mortgage due to their self-employed status. Around a quarter of those are unsure if they would be able to acquire a mortgage and 12% said they wouldn’t qualify. It’s true that the self-employed have often faced a more difficult process when applying for a mortgage. They usually must prove at least two years of work, an especially arduous task during the pandemic. However, some lenders are open to directly working with self-employed people.
In recent years, the UK mortgage market has expanded for freelancers and self-employed workers. Some lenders may be cautious, especially for those who work in specific sectors and rates are usually higher for self-employed workers.
While lenders require self-employed borrowers to fulfil extra criteria to secure a residential mortgage, the rules for approving buy-to-let mortgages were relaxed at the beginning of 2020. It became possible to apply for a buy-to-let mortgage as a self-employed person without two years’ worth of accounts making it easier to invest in rental property.Since the number of self-employed people is increasing across the UK, lenders are likely to further adapt to this with more products being brought forward for this growing consumer base.
Becoming aware of the above can help you understand mortgage borrowing and the process of buying a house. Knowing your credit score and ways to improve your mortgage application can help you better prepare and make more informed decisions. The mortgage market is currently offering a range of products with varying incentives, fees and rates. Always seek professional financial advice before making any financial decisions.