More and more people are facing financial stress due to the pandemic, making some of us unsure about eligibility for mortgage borrowing. Let’s take a look at how you can get your finances in order and become better prepared for applying for a mortgage?
How To Financially Prepare For A Mortgage
After a year of lockdowns, job losses, furloughs and businesses closing, many people are feeling anxious about their finances. Throughout the duration of the pandemic, this uncertainty has made mortgage borrowing more difficult for certain groups. In fact the whole understanding surrounding mortgages as a whole is having an impact on many, the self-employed in particular.
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How Do I Qualify For A Mortgage?
There is no one single thing you can do that will ensure your eligibility to borrow but when thinking about buying a property, you’ll definitely need to ensure your finances are in order ahead of speaking to a mortgage lender or bank. Below we outline the fundamental things you can do to boost your chances when it comes to applying for a mortgage.
Register To Vote
This 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 Deposit
The 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 stretch 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- Close any out-of-date joint current accounts that you hold with another person in case they weren’t responsible with their money.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 Stability
It’s not a good idea to look to change jobs too close to applying for a mortgage. 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.
Can I Get A Mortgage With Debt?
As far as personal debt is concerned, it won’t necessarily stop you from getting a mortgage but it will affect the amount a lender is willing to lend. If you have large monthly loan repayments to make it will reduce the amount of income you have to spend on your mortgage. The Gov.uk website has some helpful debt advice.
Credit 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
- 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 Habits
Mortgage 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, 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
Compare Solicitors Fees
Understanding what you spend also means that if there are any areas where your spending is higher than you would like, you can take some steps to get on track. Compare solicitors fees today with a conveyancing quote. Our comparison tool is totally free with no obligation
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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 fulfill 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 what a lender is likely to lend to you. 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.
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