For many first time buyers, buying your first house can be quite a daunting thought. That’s why I’ve put together a very simple step by step guide to getting your first mortgage. I’ll cover everything you need to know. The good news is that most of the work mentioned here is done by me (or your solicitor). This is one of my longer posts but hopefully if it applies to you then you will gain a good understanding of the whole process.
Lets get started!
Step by step guide to getting a motgage
1. Establish your finances
This may sound obvious but this is absolutely crucial to avoid later disappointment. Before you do anything else you need to know the following:
- How much deposit will you be able to put down towards the purchase of the property? The days of 100% mortgages for new purchases are a thing of the past. As a minimum you will need 5% of the purchase price. So for a £100,000 property you would need a minimum of £5,000 deposit. However, if you can get 10% it will normally mean you qualify for a better interest rate. This will then help to make the regular monthly payments more affordable. It’s worth noting that if you’re considering buying a new build property, most lenders will not go above 90% LTV. There a some that will but the market place for lenders is much smaller. You can consider Help To Buy equity loans but that is an entire discussion on it’s own. I will cover Help To Buy equity loans in another post.
- Have you accounted for legal fees. This is an unavoidable cost when buying a property. We work with a select few solicitors who have proven to be very reliable in the past. When given the choice, I will always choose solicitors who are like minded people. I believe it’s extremely important that my clients can get on well with their solicitor. Buying a property can be stressful so I need to know if I recommend a solicitor to you that they will be approachable and easy to talk to. And of course very good at what they do! I want you to be as comfortable as possible every step of the way. The cost of a solicitor will vary depending on the value of the property you’re buying. Also if it is a lease hold property or freehold. There may be other things that are required that can also influence the price. But as a general rule I always tell clients to allow for around £1000 for your legal fees.
- Will the property need any minor or major renovation work doing to it? If so, will you have enough money spare to do the things you want to do to the property. Buying your first property is exciting. It’s easy to get carried away when you see the potential of a property that’s in need of some TLC. You have the vision of how it would look and feel and you can get caught up in the moment. For any project properties it is absolutely essential that you understand how much you will need to spend to make it how you want it. With any property deals my golden rule is to know the way out before you make your way in. It’s no good buying something that needs a lot of work only to discover when you’r in that you can’t afford to do it.
- Furniture – another obvious one. But when you get caught up in the idea of buying your first home it’s easily overlooked. The last thing you want is to get committed to buying a property only to realise that you can’t afford to put anything in it. Always factor this in when you’re working out how much you have for deposit, solicitors etc.
- Do you know if you will need to pay stamp duty? The good news is that in the autumn budget of 2017 stamp duty relief was announced for first time buyers. Stamp duty no longer applies for first time buyers if the purchase price of the property is below £300,000. Check out this link to see a Stamp Duty Calculator.
When does the fun start? This is boring!
2. Consult with a highly reputable mortgage advisor (that's me by the way!)
Buying a property can be stressful at the best of times. When you’re a first time buyer that feeling can be amplified as it is all new to you. There is great value in using a mortgage advisor. They are there to help and guide you through the process from start to finish. Initially you will have a consultation to discuss what it is you want to do. Maybe you’re already seen the house of your dreams. Or perhaps you need to know how much you can borrow. The initial discussions will cover a full fact find. This is to establish all of your personal facts and figures that any mortgage lender would need to know. This information is also important as this is what an advisor will relay on to help find the right mortgage lender for you. It’s not uncommon for clients to have a perfect credit score and very high income in relation to what they want to borrow. But likewise it’s equally common that clients may not have a great credit score. They may also need to borrow an amount that some lender are not prepared to offer. Of course we always get our clients the best mortgage deal. But we have to get them the best deal that is available to them based on their circumstances. This is why the fact find is so important and crucial that the information you give is accurate. You will need to provide a number of documents to support your application. Typically we will ask for the following as a minimum:
- Primary ID – either a passport or driving licence
- Secondary ID – proof of address. This would typically be a utility bill, council tax bill, HMRC letter. This will need to be dated within the last 3 months
- Latest bank statement showing your salary/income credit going into your account
- Income verification – last 3 monthly payslips or last 6 weekly payslips. If self employed we can use your SA302 + tax year overview form the last 3 years were possible. OR an accountants reference.
3. Decision in principle
So you know how much deposit you’ve got. You’ve accounted for solicitors fees. If you will have to pay stamp duty then you have made sure you have the funds in place for that also. You’ve got an awesome mortgage advisor that’s given you some great advice so far. You know how much it’s all going to cost. It’s time to get the ball rolling!
All mortgage applications are done in 2 stages. The first is called the decision in principle (DIP) – or application in principle (AIP). They’re basically the same thing but different lenders refer to them differently. The DIP is where we submit some information to the lender about you, the mortgage you want, and how much you want to borrow. This is also the mortgage lenders chance to run a credit check on you. The numbers all need to stack up in terms of the lenders affordability. Does your income support the level of borrowing your want. We will already know the answer to that prior to this stage – that’s an important part of my job. Assuming the lender is happy with your income in relation to the mortgage and your credit check is satisfactory then we have a Decision In Principle Agreed. Now you are free to start putting in offers on houses that you would like to buy. Do not make any offers on properties prior to having a decision in principle agreed. Estate agents typically will ask to see a copy of your decision in principle before they will accept any offers. If you make offers before you have a DIP agreed you may well be setting yourself up for disappointment.
Oh my god, they accepted our offer!
4. Full mortgage application
So you decided to make a cheeky offer below the asking price. You’re waiting patiently for the estate agent to call you back with some news. (you will probably spend a lot of time waiting for estate agents to call you back). Finally, your phone rings and it is the estate agent. You can cut the atmosphere with a knife. Would you believe it – they have accepted your offer! Now things really start to heat up.
Once you have an offer accepted on a property it’s time to submit the full mortgage application. This is fairly straightforward. We are simply continuing from where we were with the DIP. We are simply proving more information now about you but also about he property you are going to purchase. When we have completed the full mortgage application the lender will advise what documentation they would like to see to support your application. You will have already provided me with a number of documents which will hopefully be sufficient. However it is not uncommon for lenders to request more pay slips, or more bank statement etc.
Your full mortgage application gets sent in to the underwriters. It is their job to assess your case. They will look at the application and make a decision based on all the information provided including your supporting documents. If they are happy with everything then the next step will be to the property valued.
It's happening! We're buying a house!
5. Property valuation and surveys
Before a lender can offer you a mortgage they need to make sure that the property is worth what you’re paying for it. The reason for this is to protect themselves. You may have hard the saying – Your house may be at risk if you do not keep up with payments on your mortgage. This is because the house is secured against the mortgage money that your are borrowing to buy the house. This security means that in the worst case scenario, if you’re unable to maintain your monthly payments, the lender could repossess the property. They would then sell it in order to get their money back. This means they have to be sure of the properties resale value. If they need to sell if then they need to be sure that they can get their money back. However I must stress that repossessing a property is the absolute last choice and doesn’t happen very often at all.
So – the valuation. Now you know why the lender has the property valued. As soon as the lender is happy with the mortgage application they will instruct a valuation to be carried out. Assuming that the valuation comes back with an acceptable figure then the lender will move to provide a full mortgage offer.
Additionally you may also decide at this point that you would like to have your own survey done on the property. The basic mortgage valuation is not done to uncover any problems with the property. As I explained previously, it is only done to establish the resale value. If you’re buying an older property you may like to know if there are any hidden surprises waiting for you. There are a number of different kind of survey that you can have as a home buyer:
- Survey level one: RICS Home Condition Report (HCR) The RICS Condition Report describes the condition of the property, identifies any risks and potential legal issues and highlights any urgent defects. It uses simple ‘traffic light’ ratings to clearly identify the condition of the key elements of the property. Typically, the lowest priced of the surveys, it is aimed at conventional properties and newer homes.A Condition Report is a very basic ‘traffic light’ survey and the cheapest, costing around £250.
- Survey level two: RICS HomeBuyer Report (HBR) This is most suitable for conventional properties which are in reasonable condition. The report gives you more detailed information and provides the choice of either a survey or a survey & valuation. HomeBuyer Report (survey) Includes all the features of the RICS Condition Report. It also includes advice on defects that may affect the property with repairs, and ongoing maintenance advice. HomeBuyer Report (survey & valuation) Includes all the features of the RICS Condition Report, plus a market valuation and insurance rebuild costs. It also includes advice on defects that may affect the value of the property with repairs, and ongoing maintenance advice
Survey level three: RICS Building Survey Essential for larger or older properties, or if you’re planning major works. The most comprehensive report provides you with an in-depth analysis of the property’s condition and includes advice on defects, repairs and maintenance options.
6. Mortgage offer
Once the lender has an acceptable valuation report they will instruct the full mortgage offer. Once you have your mortgage offer this means that from a mortgage point of view you have everything you need. From this point onwards it is only the legal work left to do.
That was a much shorter section.
7. Legal work
Once you have a formal mortgage offer in place the legal work can be completed by your solicitor. I strongly believe that it is important to find a legal representative that is reliable, good at what they do, and someone that will actually call you back. But I also place a lot of value in the personal skills they possess. You may have to have numerous conversations with this person. Sometimes you might not understand things. This is why I feel passionately about working with solicitors that are not only good at what they do but also very personable, like minded people. Thankfully I can recommend a solicitor that would tick all these boxes for you.
The legal process normally takes a few weeks but if here are any issues it can take longer. The legal work will finally end with you exchanging contracts, paying your deposit, and then officially moving into your new home.