Applying for a mortgage can be a lot of hard work. Even if you've already found your dream home, getting accepted for a mortgage can be just as long and stressful!
In thus guide, we'll talk you through the five main steps:
1️⃣ Getting your finances in shape
2️⃣ Finding the right mortgage
3️⃣ Applying for an Agreement in Principle
4️⃣ Getting your paperwork in order
Get your finances in shape
Sorting out your finances in advance will help the application process go smoothly and increase your chances of actually getting a mortgage.
Lenders need to know that you can afford the costs of a mortgage. They judge this by looking at financial information about you. Here are eight ways to get your finances in shape so lenders like what they see:
1. Save a decent deposit
You normally need to save a house deposit of at least 5% of the property price. If you can save more, you have a better chance of being accepted and getting a cheaper interest rate.
2. Budget!
You may have to provide recent bank statements when you apply for a mortgage. It’s important for these to show consistent income and outgoings, with enough left over at the end of the month to comfortably pay the mortgage.
Follow your household budget carefully for several months before your mortgage application. If you use Monzo, set a monthly budget to track your spending and stick to your goals.
Need help with budgeting?
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Download Monzo3. Pay down debt
It can be worth paying off high interest debt that’s draining your income. This can free up money for your mortgage payments and reassure the provider that you won’t have conflicting commitments.
4. Use a mortgage calculator
These can give you a rough idea of how much you could borrow, based on things like your income, outgoings and deposit. It’s a useful way to see if your finances are on track. But remember, these calculators are just a guide – your mortgage application will look at your finances in much more depth.
5. Build up your savings
Lenders want to know you can meet the monthly payments even if something changes, such as losing your job or the mortgage interest rate going up. As a general rule, it’s good to have three months’ worth of income tucked away for emergencies. If you use Monzo, you could save this money in a pot and lock it until after your mortgage application.
You also need money set aside for the extra costs of buying a home – such as stamp duty, solicitor fees, survey fees, removal and furnishings.
6. Improve your credit score
Mortgage providers like to see that you have a good credit score. This reassures them you’ve been a responsible borrower in the past. There are many ways to improve your credit score – including paying bills on time, staying below your credit limits and registering to vote. Try not to apply for mortgages (or any other credit) more than once over a short space of time, as each application will temporarily lower your score.
7. Think carefully about joint mortgage applications
When you apply for a mortgage with someone, the lender looks at financial information on both of you. This can be a good thing, as you can report a higher income if you both work. But you should also consider whether the other person has debt or a low credit score that could damage your chances of acceptance. And remember, there are pros and cons to sharing your finances.
8. Consider using a guarantor
Lenders see some people as high risk, such as first-time buyers or people with a low income. One way to reduce risk for the lender and boost your chances of acceptance is to use a guarantor. This is someone – often a parent or grandparent – who agrees to make the payments if you can’t. Just be aware that there are risks for the guarantor.
Find the right mortgage
A mortgage is a big financial commitment, so it’s essential to choose the right one for you. This should increase your chances of getting accepted and reduce the risk of problems in the future. It’s often worth getting mortgage advice from an independent financial advisor. For now, here are some factors to think about:
How you want to repay the mortgage
There are two main ways to pay your mortgage provider:
Repayment mortgage
This allows you to pay back the money you borrowed over a number of years. You’ll make monthly payments that include interest. The idea is that your debt will be cleared when the mortgage ends.
Interest-only mortgage
With this type of mortgage, you only pay interest each month. You repay the loan when the mortgage ends. Mortgage providers usually need proof of an investment that can help you do this.
It’s also worth thinking about the mortgage term. This is how long you have to pay off the mortgage, such as 10, 15 or 25 years. The shorter the term, the bigger your monthly payments will be. The longer the term, the more interest you’ll pay overall.
Finally, check whether the lender charges for making overpayments on your mortgage. Overpaying means you pay more than the usual monthly amount, which you may want to do to pay off your mortgage faster.
The mortgage interest rate
A lower rate means you pay less interest. It’s worth shopping around to find a good rate – but remember to compare fees too. Some mortgage providers offer low rates, but charge high arrangement or booking fees so they don’t lose money.
You should also think about the type of interest rate you want. Each type offers different risks and flexibility.
Fixed mortgage rate
A fixed interest rate won’t change for a set period of time. This means you’re protected from rate rises that would increase your monthly payments. But it also means you won’t benefit from rate dips that would make them cheaper.
Once your fixed rate ends, you’ll usually be put on the mortgage provider’s standard variable rate. You can normally switch to a better deal at this point. If you to try to switch your mortgage during the fixed period, you usually have to pay a penalty fee.
Variable mortgage rate
A variable interest rate can go up and down. This means the amount you pay on your mortgage each month can increase or decrease. There are several different types of variable rate, including:
Standard variable rate (SVR) – the normal rate your mortgage provider charges.
Discounted – a discounted version of your mortgage provider’s SVR, such as 2% lower.
Tracker – this changes in line with another rate, usually the Bank of England base rate.
Capped – this rate can’t rise higher than a certain percentage.
Pay attention to when interest is charged. Daily is normally the cheaper option.
Apply for an Agreement in Principle
Before you apply for a mortgage, get an Agreement in Principle (AIP) online from a mortgage provider or broker. This shows whether you’re likely to be accepted for a mortgage. It doesn’t guarantee it, but it’s a good way to test the waters. And unlike a mortgage application, it won’t affect your credit score.
An AIP is usually only valid for 30 to 90 days. But unless your finances change a lot, chances are you’ll get accepted for the same one again.
Get your paperwork in order
Make sure you have the following on hand for your mortgage application:
Your passport and driving licence
Pay slips, bank statements and household bills for the last three to six months. You made need hard copies rather than digital printouts. Need a bank statement from Monzo? You can download one straight from the app.
A P60 form from your employer
Business accounts and tax records for the past two to three years if you’re self-employed
A tax return form SA302 if you’re self employed or you get income from multiple sources
The address of the property you’re buying
Contact details for the estate agent and your solicitor
A gift letter if you’re getting help with your deposit, such as money from your parents. This letter should say that the money is a gift, not a loan.
Apply for the mortgage
It’s essential to provide accurate information in your mortgage application, so make sure you:
Set aside plenty of time to apply
Have all the documents you need
Keep a clear head
Get someone to help you check facts and spot errors
Once you submit the mortgage application, it can take around 18-40 days for the mortgage provider to process it.
If you’re accepted, the provider will give you a binding offer and a mortgage illustration that explains the terms of your mortgage. You’ll have at least seven days to consider and compare the offer before accepting it.
Good luck! 💪
To get help with saving up for a deposit, and organising your money as you prepare your application – try Monzo today!