Finally ready to spread your wings and flee the nest? Already living independently and tired of paying off your landlord’s mortgage for them? Knowing how to prepare for your first mortgage and where to start can seem like walking blindly through a mine field sometimes if you don’t get the right help and guidance. As professional mortgage experts who only want the best start for new buyers, we have compiled a blog that should answer the main questions you might be having.
Where Do I Begin?
One of the most important if not THE most important things you need to remember when thinking about getting your own property is your deposit. Every property purchase will need some form of deposit which 99% of the time, must come from your own sources. This will essentially be the foundation of your property purchase.
Most mortgage lenders now will need a minimum of 10% of the price of the property as a deposit with many requiring 15 or 20%. Months, or most likely years before you are ready to purchase a property, you will need to start thinking about where you are going to get your deposit from. Almost all mortgage lenders in the UK mortgage market will need your deposit to come from one of the following places:
- Your own personal savings
- Equity from the sale of another property
- Family gifted deposit
Some lenders will accept a personal loan as a deposit however you are literally limited to one or two lenders and the added monthly commitment of the deposit loan will affect your mortgage borrowing potential. So where possible, the other options are definitely recommended.
Types Of Deposit
The most common deposit types for first-time buyers are from your own personal savings or a family gifted deposit. If you are going down the route of saving your own deposit, this may take some time to do. You will need the full 10, 15 or 20% deposit plus any other fees you may need to pay like mortgage broker fees or solicitor fees ready and in place by the time you start looking at properties. This will mean that you can focus on finding your ideal property and securing your mortgage rather than worrying about scraping extra money together.
By carefully budgeting and putting a portion of your monthly income away in a deposit fund or savings account will ensure that your deposit builds and eventually you will have enough to contribute towards buying your first home. If you have savings in other forms such as stocks and shares or other investments, these can also be used towards your deposit however they will all need to be cashed in by the time you start looking for a property at the earliest.
If you are lucky enough to have generous family members who are willing to contribute towards your deposit, this will definitely speed the process along a bit. Most mortgage lenders will accept a gifted deposit from close family members, and it is become increasingly more popular for first time buyers who are struggling to save their own deposit.
A close family member is usually someone like a parent, grandparent, aunt, uncle, brother, sister. But with quite a few lenders, this can be extended to cousins. There is no limit to how much the family member can gift you. There are however some concrete rules:
- The money for the gift must be ready and available by exchange of contracts
- It must be a non-refundable gift. Meaning that you aren’t expected to pay it back, otherwise this would be classed as a loan.
- With most lenders, your gifter will be required to complete a gifted deposit form or letter that explains that they are giving you a non-refundable gift.
- The funds must be in your gifter’s bank account and have an audit trail that the bank can follow. They will most likely need to see 3 to 6 months bank statements to evidence where the deposit has come from.
- If the money originated from the sale of something like a property or a car or anything else, they will most likely need to see a memorandum of sale to prove that this sale took place.
If you want to contribute some money from your own savings and top up the deposit with a family gift, this is also allowed if your total deposit still covers the minimum required.
How To Prepare For Your First Mortgage And Finding Your First Property
The next step is to speak to a mortgage advisor. Some people might think that you don’t need an advisor and you can just go to your bank. That is probably the worst decision you could make as a first-time buyer. Yes, going to your bank might seem like a simple and easy thing to do but it couldn’t be further from the truth.
If you go direct to your own bank, you will be completely limited to that specific bank’s mortgage criteria rules. Each bank has their own rules, what they will and won’t accept. Their own mortgage affordability and deposit criteria. And each bank treats first time buyers differently. By going to your own bank and not exploring your options on the open mortgage market, you are seriously hindering your mortgage potential and will more than likely not get the best deal for your own circumstances.
By speaking to a knowledgeable mortgage advisor, you will get advice and guidance that a bank won’t be able to give you. If you speak to an advisor like us, the process goes like this:
- You call our friendly and helpful team on the phone or send us an email to say that you are looking to get your first home.
- One of our expert advisors (who have all been first time buyers at one point too!) will have a chat with you over the phone to get to know you and what you are looking to do. They will go through a few financial details with you such as your deposit amount, your annual income, and your monthly outgoings so that they can get an idea how much mortgage might be available to you.
- They will then use this to give you an idea of the maximum property price you can look at and you can start the exciting part, finding your first home!
What Is Mortgage Affordability?
You might have heard people talking about mortgage affordability when looking at how to prepare for your first mortgage, but what does it actually mean? Mortgage affordability is basically how much mortgage you can borrow from a bank based on your income, outgoings, and deposit. Each mortgage lender has different mortgage affordability rules which is why speaking to an advisor is so important.
The general rule of thumb that lenders follow is that they will potentially be able to lend you 4.5X your gross annual income. Meaning that if you and your partner both earn £30,000 a year each, you may be able to borrow around roughly £270,000. Some mortgage lenders will actually lend over 4.5X income depending on things like job progression and projected future earnings but this will need to be assessed as an option by your mortgage advisor and does not apply to everyone.
The amount a lender is willing to lend you can go down as well depending on how many credit commitments you currently have. If you have any loans, hire purchases, credit cards, store cards or any other credit commitments that you pay per month, the mortgage lender will reduce the amount they are willing to lend you. If you just go direct to your bank, they will have a black and white, yes or no answer on how much they will be willing to lend you. If you speak to a mortgage advisor like Oportfolio who have access to over 100 different mortgage lenders, we can find a more generous lender.
Knowing your mortgage affordability and having your deposit amount clear in your mind will let you know what property price you can afford. Let’s take the example above of the couple earning £30,000 a year each. Their maximum mortgage available when they spoke to their mortgage advisor was £270,000. They managed to save £15,000 themselves and received a £15,000 gift from their parents meaning their total deposit is £30,000. By combining the £270,000 mortgage and £30,000 deposit, they know that they can start looking for a property worth up to £300,000.
Where Do I Start Looking For My First Home?
The best places to start looking for your first home are online, through an estate agent or the good old-fashioned way of walking/driving around and seeing what tickles your fancy. If you go to online databases like Rightmove, you will be able to filter the properties for sale in your area so that you can find properties in your budget and that also match your requirements.
Contacting a local estate agent is also a very good option when looking for your first property. By giving them a call and letting them know your budget and what you are looking for, they will be able to take your round some of their listed properties. Even if they don’t have any properties on their books that match your specifics, they will keep you in mind if anything comes up or if they see anything listed by another estate agent.
Sometimes just driving or walking around the area you are looking to purchase in is the best way to find a property. Taking a stroll and looking out for ‘for sale’ signs can be a fun and exciting activity although you will need to call the estate agent or look online to find out the specifics of the property.
I’ve Found My New Home, What’s Next?
So, you’ve found your new home. The next step is to make an offer. An offer will need to be made to the estate agent selling the property who will then pass it on to the seller to see if they will accept it. Most estate agents will not accept an offer from a buyer unless they have something called a mortgage in principle or decision in principle.
This is a credit check that must be carried out before you make an offer on a property. The credit check will be carried out by your mortgage advisor through one of their recommended mortgage lenders. This credit check just makes sure that there is nothing wrong with your credit that could stop you from getting a mortgage further down the line. Things like missed payments, defaults, county court judgements, individual voluntary repayments, and bankruptcy.
A credit check is normally a quick and easy process that can be carried out at any point prior to you making an offer. As long as the credit check comes back ok, your mortgage advisor can pass it on to the estate agent and you will be able to make an offer. If there are any issues with your credit check, your mortgage advisor will need to take a more in-depth look at your credit file and will be able to advise you of the next steps. This may be just running a check with a different lender.
Making an offer is a great way of getting a good deal on your new home. Although there will be an asking price, your mortgage advisor will be able to give you some guidance on submitting a reasonable offer that could potentially bring the purchase price of the property down and save you some money. However, in a competitive market with high demand for housing, putting in a lower offer may not be the best option.
Offer Accepted And Getting A Mortgage
If the seller accepts your offer…..great news! If they don’t you may need to re-group with your advisor and make a higher offer if you can afford it. If not, then it’s back to the drawing board I’m afraid.
Once your offer has been accepted, you can crack on with getting the mortgage. The quicker you can get the mortgage application under way, the sooner you can relax. Your mortgage advisor will begin by asking you for your mortgage application documents. These normally consist of three months bank statements (the last three months), three months pay slips (if you are employed) or two years tax documents if you are self-employed, proof of deposit, and proof of ID (passport or driving licence). All of these documents are standard requirements that the mortgage lender will need to see as proof of income, outgoings, and to make sure you are who you say you are.
Your advisor’s administrator will compile all your documents and check that everything is in order for you. Your advisor will then do their own research of the market and current mortgage deals and form a recommendation for the best mortgage they can possibly get you. They will then send this over to you and have an appointment with you to run through everything. As long as everyone is happy with the mortgage, the advisor and their administrator will submit your application and the supporting documents.
It is at this point that you will also need to instruct a solicitor to act on your behalf to complete the legal side of the purchase. This is a standard practice to ensure that everything is done legally, and no one is doing anything wrong in the property sale/purchase process. Your mortgage advisor will be able to recommend a trusted solicitor or alternatively you can do your own research and get some fee quotes yourself. Normally the fees for a solicitor are between £1-2K but can fluctuate between solicitors. They will work in the background to make sure that the purchase process is moving along smoothly.
Nothing. For the time being. Now is the waiting period as your mortgage application is assessed and considered. As long as your documents are all correct and your application has been submitted correctly, your application assessment should go through within a few weeks. If there are any issues with the application or further questions that the lender has, they will contact the mortgage advisor to let them know and your advisor will liaise with you as soon as possible to resolve the issue.
It is at this point that a valuation is also carried out on the property you are looking to buy. This is completed on behalf of the mortgage lender by their own valuers to make sure that the property is worth what it is being sold for and that there are no serious issues with the property that could mean that the bank loses money. As long as the valuation comes back ok, the application is normally accepted.
Once your application has been assessed and approved, the lender will issue the official mortgage offer! This document is normally electronic and sent to your advisor who will pass it on to you and your estate agent. Your solicitor and the seller’s solicitor will also be made aware, and they will start arranging for exchange of contracts to take place. Exchange of contracts is the stage where you essentially buy the property. When this happens depends entirely on the solicitors now and the situation of the seller. If the seller is buying a new home themselves, this separate purchase may hold things up. This is known as a chain. If your seller is not buying a new home then exchange of contracts can happen very quickly.
Exchange Of Contracts
At an agreed date chosen and confirmed by your solicitors and the seller’s solicitors, your exchange of contracts will take place. Your solicitor will request the mortgage funds from your mortgage lender who will transfer the funds to them. They will also ask for your deposit which will also be transferred by yourself. Once your solicitor has all the funds, they will then send it to the seller and their solicitors to purchase the property officially. Once a legal purchase has taken place, the property is practically yours!
What Happens After Exchange Of Contracts?
After exchange of contracts takes place, a completion date will be set. This is the final date for everything to be settled and completed. All paperwork, fees etc. After the completion of the purchase, you will also start to pay back your mortgage to the lender. On the completion date, you will be able to move into your new home!
So, that’s it. That is the process of buying your first home in a nutshell. Of course there may be some questions that you have that we might not have covered but don’t worry. We are here to help you every step of the way so if you do want to ask any other questions or want to get the ball rolling with purchasing your first property, please feel free to give our advisors a call.