What information do you need when applying for a Mortgage?
What information do you need when applying for a Mortgage?
If you’re about to apply for your first mortgage, mortgaging to move home or just remortgaging on to a better rate, it’ll seem like there’s an endless list of things you need to know. But don’t worry! We’ve managed to compile the essentials here for you. The secret to reducing mortgage stress is preparation. Read on if you want to find out what you need to do!
How does applying for a mortgage work?
First you need to understand what applying for a mortgage actually involves. This can seem complicated but, it doesn’t have to be this way.
Basically, a mortgage is a loan secured against your property & works much the same as a car loan. A Bank / Building Society lends you money to purchase your home & charge interest on that money. As a car loan, until you make your final payment your Bank / Building Society can repossess to get their money back should you stop making your monthly payments.
If you’ve got a good credit score, a sustainable income and you’re not too extravagant with your spending, applying for a mortgage can be quite a simple process. If you don’t tick these boxes, completing your mortgage application can still be stress free, as long as you prepare that little more diligently.
First thing for anyone to do before applying for a mortgage is to obtain a copy of your credit report. This document shows not only your recorded address history but also a list of loans & credit agreements that you’ve had in the past six years, your ability to make payments on time, any outstanding balances, even people you may be financially linked with. Your credit report is one of the main things any lender will be reviewing prior to making any sort of decision on their likelihood to lend to you.
Credit reports aren’t always perfect so, check that the information contained is correct, shows you at the correct address & any defaults or missed payments are as you feel. You’ll be surprised how many people have missed payments lodged against them when its an accounting error by the provider. If you find such anomalies, contact the provider in question to have the mistake corrected.
Unused Credit Cards
When you’re going through your credit report you’re likely to see credit cards listed that you no longer use. Maybe you’ve switched them to a better deal or simply have no need for them anymore. It’s worth contacting the provider & stating your wish to close the credit card account completely remembering to check that all monies & any closing fees are cleared in full, The reason for doing this is that, while the credit card remains “live” you have the ability to borrow on it, which is something that your potential mortgage lender may not be comfortable with.
Credit Card Payments
For your remaining credit cards, ensure that the monthly payments made are above the minimum amount requested. Remember, when you are applying for a mortgage you are proving that you are financially worthy. Making minimum payments on a credit card doesn’t give this impression & doing so can have an adverse effect on your credit score.
Whilst going through your credit report it’s definitely worth checking where you are showing as living. If its not the correct address then, all likelihood that you’re not on the electoral register. This is pretty important for lenders, as it’ll provide easy access for them to check your credit history. If you’re not registered, then you can do it here - visit the Government’s site.
Proof of identity
So, for you to make an eligible mortgage application you’re going to need to prove your identity. This can be done with relative ease. For example, you can show your passport or driving licence.
Two common easily correctable mistakes here are driving licences showing the wrong address or passports that are out of date. If either of these apply to you then get it sorted. In the case of the driving licence, you’re actually breaking the law. If you are recently married & your passport is still in your maiden name, then you will need to supply a copy of your marriage certificate to verify proof of identity.
Proof of income
While you can probably imagine why your proof of income is pretty important when you’re applying for a mortgage, it won’t do any harm to run through it anyway. Ultimately, this is going to be vital for lenders to decide how much you can borrow. In the recent past, lenders would typically let you borrow roughly 4 to 5 times the amount that you earn. This was the same if you’re buying a property as a joint applicant. However, with the advancements in technology, such a simple calculation simply will not suffice. Now days the banks use complex algorithms & use data from the Office of National Statistics to produce the amount they would be willing to lend.
Whatever the case, if you’re employed you are going to require your latest three months payslips for all jobs along with latest P60’s. If you receive any form of bonus, then you will need to prove that this is historical & ongoing. When a bonus is annual this means you will have to provide proof of receipt for past two years. The same applies for overtime, you need to prove its regular & consistent. This is when it’s worth having latest six months payslips to provide corroborating evidence.
If you are on a zero hours contract you may be required to provide 12 months payslips as the lender needs to see a consistency in earnings.
If you’re self-employed then you’ll need your latest three years SA302’s along with supporting tax over-views. You can request these from HM Customs by logging onto their site or, alternatively request them from your accountant. If you haven’t been trading this long then, it may not be an issue, but you will be more limited in your choice of lenders.
If you are relying on any form of government payments such as tax credits then definitely have your award letter to hand as this could be requested as proof by your chosen lender.
If you are in receipt of maintenance payments, which you wish to use maintenance payments then, a copy of the court award letter may be requested but, even if not required you’ll need to show the payments regularly made into your bank account as proof.
With any form of child tax credit or maintenance payment, the lenders may not accept if the payments are coming to an end.
With regards to your outgoings, once your lender has seen your income they’re going to judge whether your income can sustain repaying your new mortgage payments and your current levels of expenditure. Lenders will look at your credit report to see how you maintain credit commitments as well as looking at your bank statements.
You will need to supply latest three months bank statements for all bank accounts you hold. With bank statements the lenders are looking at how you conduct yourself financially. Are you financially adept or are you living in your overdraft from one month to the next? Obviously, the latter is not great news, especially as you are now intending to add a mortgage to your outgoings.
Outgoings that you have no choice on such as travel, utility bills etc will be included. Lifestyle spending commitments such as gym membership, which can be stopped without impact aren’t generally taken into account.
Pay Day Loans
These are worthy of their own note as they are the biggest alarm bells to a lender. If you can’t currently survive to the end of the month without a pay day loan, how on earth are you going to manage a mortgage.
Now you have your ducks in a row when it comes to what’s required for a mortgage you need to decide, are you going to do your own research & apply to your chosen lender or are you going to use a mortgage broker / adviser.
Using a Bank or Building Society seems the most straight-forward option, especially as you won’t have to pay a fee to a mortgage adviser but, there are down sides to this option.
Firstly, understanding how each lender views additional income & expenditure can be a minefield as each look at things slightly differently.
Secondly, you’ll only be getting a selection of mortgage products from that lender. Yes, you may have chosen a particular bank because the rate in the star was the best on the market but when, for some reason you don’t qualify for that rate you’ll be offered an alternative deal from that lender even if its not a market leading rate. You’ll never have a lender tell you to go to the bank up the road as their rates are better.
Thirdly, you’ll need to fit in with your chosen Bank / Building Society’s working times. If you can only do a Saturday morning, then this can be quite a wait for an appointment. You’re also going to be responsible for keeping everyone in the process informed & do your own chasing.
Using a Mortgage Adviser / Broker can also be as challenging, it’s all about choosing the right one. Make sure your chosen adviser has access to a comprehensive range of lenders, by that I would expect a good adviser to have access to at least 80 different lenders, we have over 130 lenders at last count. This is important as you need to be getting the best rate for you not the best rate available to the Adviser.
Make sure the Adviser has administrative support. You don’t want a one-man band that is only earning while they’re submitting business. You want someone who has the infrastructure in place to chase your application right through to completion, thus avoiding unnecessary delays.
A big advantage of using an Adviser is that, not only are you getting access to a greater range of mortgages but they will often meet with you day time or evening, weekday or weekends, which makes life for you a whole lot easier.
This service obviously comes at a cost & this is where it gets tricky. Some brokers charge a set fee & some charge a percentage of what you are borrowing. The percentage option is OK if you have a small mortgage but, what would you rather pay for your £200,000 mortgage, 1% or a £500 fee. Yes 1% sounds low but it actually equates to £2000 so, be warned.
A fee of £500 is about average for a straight forward mortgage, with more specialist mortgages such as Limited Company Buy to Let or mortgages involving adverse credit warranting a higher fee.
Getting an agreement in principle
Your paperwork is sorted & you have chosen the mortgage. Next step is getting an agreement in principle. This is where you make an initial application to the lender chosen. You / your broker enter details of your income, expenditure & loan amount required into the lenders system & the lender gives their opinion. At this point they will also electronically check your credit report as a cross reference.
The outcome will be either:
Accept – You have been accepted for what you have asked for based on the information provided. You will still need to verify what you have told the lender but, as long as what you have entered is true then you’re on your way.
Refer – This is when something has flagged & the lender requires further information. It may be that you could be required to alter the term of the mortgage or the loan requested.
Fail – This is when your criteria does not meet that required by the lender. It would be worth you or your adviser speaking with the lender to find the exact issue as it may be something impacting you that you weren’t aware of, which can be easily rectified. Ultimately though, you’re probably going to be looking for another lender.
Once you have an “Accept” decision in principle its full steam ahead. Time to submit a full application, along with those supporting documents.
NOTE: Even though you have been accepted for your mortgage, please don’t make an application for any type of credit during the mortgage process. Your lender reassesses your application before releasing the funds & may view your credit application sufficient to throw you outside of criteria, withdraw your mortgage offer & let you slip back to looking for a new mortgage !!!!!!!!