One of the most exciting things you will ever do is buy your own home. However, the need to obtain finance for your purchase can put a damper on your enthusiasm. We provide a guide to the requirements for obtaining a mortgage so that there are no surprises.
Table of Contents
Eligibility for a Mortgage
If you are a UK citizen, nothing prevents you from applying for a mortgage although certain factors must be considered. Non-resident or resident foreigners may have to comply with additional requirements. The most important requirements for UK citizens are your credit score, your income and level of job security, and your age.
Credit Score
Whenever you apply for credit, whether it is for a housing loan, to purchase a car, to pay for studies, to do a home renovation, etc., the first thing any lender will do is to check your credit record. A low score may prevent the bank from offering you a mortgage. Take some time to build up a better record and then reapply. You can boost your credit rating by getting all your debt settled and putting your name on the electoral register.
Income
Your income must be sufficient to make the mortgage payments every month as well as cover your living expenses. Banks have a way of calculating this. You may be offered a smaller loan and need to find a larger amount to cover the deposit. This loan amount may not be enough to cover the size or type of home your family needs, in which case you will have to wait until your circumstances improve or buy something unsuitable. You can always rent it out and stay in your current rental. You may be able to resell the property in a few years and make enough profit to buy the right home for your family.
You should also be in an industry with job security. If there have been public announcements that thousands of employees in your sector are going to be retrenched, a lender may suggest that you reapply once the threat has passed.
Age
As you grow older, there is less time left before retirement to pay off your mortgage, which can take decades. Approval of a mortgage application may depend on your ability to pay a bigger deposit. You may also receive a shorter time to repay the mortgage.
Balancing Your Mortgage and Deposit
If you are able to get a 100% loan to buy a property, it means that you do not have to find a deposit. However, most banks and lending institutions provide lower mortgages. If you cannot get a loan (0% loan) you will have to find the full purchase price (100%).
The higher the loan that is approved, the more interest you will pay back to the lender, and conversely, the smaller the loan, the less interest you will pay. Thus, it is to your advantage to save as much as you can for a deposit.
Both of these factors constitute a balancing act. A good balance is to put together a 35% deposit with your available capital and savings. Then you can request a loan of 65% LTV mortgages. With 65% LTV mortgages, you are getting a smaller than average loan and saving a lot on interest.
These guidelines will help you to get a good idea of your options when it comes to applying for a mortgage and putting a deposit down.