The mortgage application process begins with a couple of important questions and some big decisions.
The first and most important question is, ‘how much can I afford to borrow?’ Mortgage lenders’ affordability criteria typically means that they won’t lend more than four times the applicants’ joint annual income; so for instance, if couple both earned £40,000 per year, they could borrow up to £320,000 for a new home.
The second question is, ‘how much can I pay up-front?’ The larger your deposit, the better the mortgage deal you will be able to find – but there are other costs to consider. Lender and broker fees, stamp duty, survey costs, insurance and legal fees can all add to the total cost of a mortgage. As well as the deposit, you should budget for around 2–3% of the property value for associated costs.
The final decision prior to actually applying for a mortgage will be whether you find a property and make an offer before searching for a mortgage, or whether you attempt to find a mortgage before making an offer on a property. There are pros and cons for each option: sellers and estate agents look more kindly upon offers from buyers who already have an ‘agreement in principle’ from a lender, whilst lenders prefer it if applicants have already found a property.
Once you have made your choices, the application can begin in earnest.
Step one – contacting a broker
Whilst you can go directly to a mortgage lender, using a mortgage broker can be very beneficial, as it will give you access to a wide range of mortgage products. In addition, a broker will assess your circumstances and try to find a mortgage that fits your situation. The broker will recommend loans based upon affordability and suitability, and will issue you with a KFI (Key Facts Illustration) for each.
This stage of the mortgage application will involve a ‘soft’ search on your credit file, so that mortgage lenders can decide if they might wish to lend to you. Because many searches in a short space of time can adversely affect your credit rating (and this stage of the application may well involve many searches), a soft search will not show up on your credit file.
Step two – the DIP (decision in principle)
The DIP, sometimes known as an agreement in principle or even mortgage in principle, is not the same as a binding agreement. The lender who has given you a DIP is essentially saying that they are likely to lend to you pending satisfactory paperwork, credit checks and valuation of the property.
Having secured a DIP, you are now in a good position to find a property and make an offer!
Step three – the formal mortgage application
Once you have made an offer on a property, you can make a formal mortgage application. If you are instructing (i.e. ‘using the services of’) a mortgage broker, they will act as the point of contact between you and your lender, smoothing the process out, chasing up missing paperwork and generally hurrying the mortgage application along.
The lender will look at various criteria, including the property you wish to purchase, the amount you wish to borrow, your credit history and your employment status. Though you have had an agreement ‘in principle’, the mortgage may still be declined at this stage – if this is the case, your broker will try to help you understand why, find an alternative product, or advise how you might be able to improve your chances in the future.
Be aware that credit checks conducted during the formal mortgage application will appear on your credit report.
Step four – the valuation
The lender will arrange for a surveyor to conduct a valuation of your chosen property. This valuation might have an impact on the LTV (loan to value) of your mortgage – in simple terms, the proportion of the property value that you are borrowing against the proportion you are paying up front. This, in turn, may affect the interest rate or other features of the mortgage.
During this period, the lender will process the rest of your application. This will involve processing fees, chasing outstanding documents and checking all details. It is vital that each and every piece of information you put on a mortgage application is correct, as one mistake can cost you the entire mortgage.
Step five – the formal offer
Once the lender has finished processing your application, and if they are happy with the application and valuation, they will extend a formal offer to you. If you accept, they will send a copy to your solicitor (known in property as a conveyancer or conveyancing solicitor). Meanwhile, the lender’s own conveyancer will conduct final checks on the property.
Provided both parties are happy, the exchange of contracts can take place. The funds will be sent to your conveyancer, who will conclude the transaction with the seller, and the property will finally be yours.
This is known as the completion date. The keys to your new home will change hands, and you can move in. Congratulations – you are now a home-owner!
Remember to keep an eye on your mortgage – you should strive to meet the monthly repayments by the agreed deadline, and inform your lender if your circumstances change and this becomes difficult. Also remember that new deals may crop up, and a few years down the line you may be eligible for a better rate. If this is the case, get back on the phone to your broker – they may be able to help you again!
By Ben Gosling of TurnKey Mortgages