Are you mortgage fit?
Are you looking at getting a mortgage? Get yourself in the best position now! Whether you’re a first-time buyer, wanting to move, or remortgaging, work your finances into the best possible shape to get the mortgage you want with these simple steps.
1. Work your credit score in to shape
When they’re assessing your application, mortgage providers get data about your financial history from credit reference agencies. There are a few different credit reference agencies and they each look at your data and give you a numerical credit score. Lenders feed this information into their internal ‘scorecards’, along with other criteria, for example your employment status, then they’ll decide if they want to lend to you, and if so, how much.
It’s worth noting though that each lenders’ scorecard reflects their own criteria, which includes how much risk they are willing to take when they lend money. This means that a good credit score doesn’t necessarily mean you’ll get approved for a mortgage with every lender. It also means that if you have a lower credit score, you won’t necessarily get refused for a mortgage.
Maybe you’ve had a bad credit rating in the past and wonder how this will affect your chances of getting a mortgage. Some lenders take an all or nothing approach; if you don’t meet their minimum scoring requirement, they won’t lend to you. Others offer a reduced loan amount or higher rate of interest to people with a lower credit score.
You can try and improve your credit score and better your chances of getting the mortgage amount you want. Here are some tips from the Money Advice Service to improve your credit score.
2. Get your deposit looking healthy
Whether you’re a first time buyer saving for your mortgage deposit , or an existing property owner and you’re remortgaging or moving, the interest rate you’re offered by your lender will generally be determined by something called LTV (Loan to Value). This is the loan divided by the value of the property. Essentially, the less you borrow compared to the value of the property means the risk of giving you a mortgage is lower for the lender.
Knowing how much mortgage deposit is the right amount is a challenging question. If you’re saving up for a posh sofa or those luxurious curtains, you may wish to cut back on furnishings and put money towards your mortgage deposit instead. Often a larger deposit and therefore a lower LTV means a better rate, so you could save serious money on the amount of interest you pay in the long term.
And remember, there are a number of lenders, including Digital Mortgages by Atom bank, who will accept a mortgage deposit gift of cash – which doesn’t have to be from a family member – as partial or full deposit. But, you’ll need to check whether your chosen lender does this before you submit your application.
3. Strengthen your payment history
This one is a case of getting really organised and on top of your finances before you apply for a mortgage and the earlier you start, the better. It’s really important to make sure the payments you make to your creditors (for example Council Tax, utility bills and credit card repayments) are on time and up to date. Missing them can lead to defaults and CCJ (County Court Judgments) which can adversely affect your credit score. As we’ve explained above, lenders look at your history of making payments to help them build a picture of how you could act in the future. So show you’re responsible and lenders are more likely to see you as a lower risk, making the lending decision easier.
4. Put some energy behind your income
Lenders will look at what you earn when they make a decision about how much to lend to you. They’ll look at your different income sources, but they don’t tend to treat your income from different sources equally. They’ll generally look at your primary, most permanent and most reliable income (for example your basic salary from an employer) as the most important income stream.
Then, they’ll look at other income, for example, bonuses, commission, overtime and shift allowance, usually with less weighting than your primary, permanent and reliable income, but it all adds up. Go through your bank statements and payslips, have a look at your different sources of income and share them with your mortgage broker or lender.
You don’t have to be in full-time employment either, lenders still offer mortgages for self-employed people and mortgages for contractors too.
So what can you do to help the income aspect of your mortgage application, without getting a pay rise? Getting your paperwork in order can make a difference.
Make sure you have:
- Your payslips from the last six months - and more if you have them
- Your current P60
- Bank statements from the last three months
If you’re self-employed, up-to-date accounts detailing any salary and dividend payments received , as well as your Self-Assessment Tax Calculations from HMRC will be generally be needed to determine your income, so dig those out and show them to your broker or lender.
5. Tone up your financial commitments
Get organised with your outgoings. Print your list of standing orders and Direct Debits and go through them with a fine-tooth comb. Do you need your gym membership, how often do you really use it if you’re honest with yourself? Have a look at each of those payments and cancel any that you don’t need. As a general rule, when it comes to applying for a mortgage, the less outgoings you have, the better. However, it’s worth noting that having no track record of outgoings can have a negative impact too, because lenders can’t see that you’ve repaid debt – if you haven’t had any. They want to make sure that you’re not stretched when it comes to making your mortgage payments.
But remember each lender has specific policies around what they consider a financial commitment and how they treat them. For example pension payments might be classed as a deduction from your income from some lenders, but others ignore them.
You might think that if you’ve got credit card debt on a 0% APR card then it wouldn’t make as much impact in the lending decision as one with a higher APR. However, credit card balances tend to be treated the same whether they have 0% APR or not. Most lenders will assume you’re paying around 3% to 5% of the outstanding balance each month and take that as your financial commitment. But, if you clear your credit card balances each month, the majority of lenders will ignore them and won’t use the balance in their affordability calculations.
6. Show stamina with a budget planner
It’s simple, it’s boring, but it’s important. Creating a budget planner is a great way to keep track of your outstanding financial commitments and your disposable income. Yes it’s basic, but the more you know about your outgoings, the more control you can have, which can mean the more chance you have of getting the mortgage you want.
Mortgage lenders use a complex version of a budget planner to work out your ability to repay the loan, but it’s essentially the same thing. If you take a detailed account of your budget into the meeting with your broker, the lender should then be able to give you a more accurate mortgage decision. A Decision in Principle is the initial indication of how much they could lend to you, which is all based on a small snapshot of your finances. It’s not a confirmed amount, and it’s not guaranteed either. An in-depth budget can help avoid any heartache when they look at your whole financial situation when they’re calculating your formal offer.
Are you already mortgage fit and ready to look at mortgages
Speak to one of our brokers who can find the best mortgage for you, whether it’s a 95% mortgage, perfect for first time buyers, or whether you just want to know ‘how much can I borrow’. Find a mortgage broker and find out more.