Buying your first property can be one of the most important purchases you will ever make, and is likely to be one of the most daunting. It does not need to be however. Simply follow through the explanations that follow and you will be armed with all the information you need to reach a decision about the right mortgage to suit your own personal needs.
As a first time buyer you are not limited to just mortgages designed for first-time buyers, but you will have a choice from all of the mortgages available in the market dependent on your circumstances.
When looking at your eligibility for a mortgage, lenders will consider the following criteria.
- Amount of Deposit
- Employment Status
- Credit History
The mortgage amount can vary considering between providers and is usually calculated by the lender multiplying your sole income, or combined combined by a set number. Phrases such as 4 + 1 and 3.75 x joint are commonly used. These phrases simply mean that the mortgage lender is prepared to offer a mortgage for say, four times the higher income plus the amount of the lower income if a couple is buying. A single person buying would not have a secondary income and therefore could only borrow four times the single income in this example.
Income may take many forms, including: salary / wages, overtime that is guaranteed, overtime that is not guaranteed, commission, unearned income (for example, investment income, property rents); Bonuses that are guaranteed, bonuses that are not guaranteed and part-time income.
Generally, if the income is guaranteed or can be proved to have been received regularly over, say, the last three years, the lender allows the full amount of income to be included in the multiplier. If some part of the income is not guaranteed, the lender will either never allow it at all, or only allow a proportion of it to be taken into account.
Most lenders require proof of a borrower's income, unless the application is made on a self certification basis. The most common proof requested is payslips and a copy of the most recent P60 for those that are employed. For those self-employed, three years audited accounts is the norm for verification of income. Where a borrower does not have three years accounts, an official letter from the borrower's accountant may be acceptable.
For many reasons, proof of income is not always available available, and for those First Time Buyers, and others where working environments and practices have moved away from the more conventional 9 to 5, and where monthly income may come from several different sources, Self Certification mortgages allow you to declare your income without having to providing the documentary evidence usually required when applying for a mortgage.
Mortgage Lenders need to ensure that any mortgage advance they make is affordable, as theability of a borrower to repay the mortgage could lead to repossession, resulting in considerable hardship for the borrower and additional costs and bad publicity for the lender.
To ensure the risk of over lending is minimized, the lender will take into account the borrower's existing credit arrangements before assessing the amount of mortgage available based on their standard income multiples.
Existing credit commitments include the following:
- Amounts outstanding on credit cards
- Other unsecured hire purchase (HP) 'agreements from finance houses
- Unsecured bank overdrafts
- Other mortgages on other properties
- Tax bills yet to be paid (usually only relevant for the self-employed)
A couple want to know their maximum borrowing capacity. The female's salary per annual is £ 25,000 and the male's salary is £ 18,500. They currently have a hire purchase loan for £ 6,100, costing £ 280.00 per month for the next four years, and an outstanding credit card amount of £ 6350. Assuming an income multiplier of 4 plus 1 or 3.5 times joint income, the calculations for maximum borrowing would be as follows.
3% of £ 6350 credit card = £ 190.50 per month + £ 280 per month loan payment, giving a total of £ 5646 as an annual commitment. This amount will be deducted from the borrowers income before applying income multiples.
4 + 1 times income multiple
£ 25,000 – £ 5646 x 4 + £ 18,500 = £ 95,916 maximum lending
3.5 times Joint income
£ 25,000 + £ 18,500 – £ 5646 x 3.5 = £ 132,489 maximum lending
The example above shows that the lender will be prepared to offer a mortgage of between £ 95,916 and £ 132,489 based on the details provided by the borrower. The lender will rely on the honesty of the borrower in disclosing all existing credit commitments on the application form, but will complete and compare their own credit checks and credit scoring upon application receipt. If the lender signs that there is some doubt as to affordability of the mortgage repayment, then bank statements and payslips will often be requested so that the underwriter can review account conduct. As mortgage fraud is an increasing problem for many lenders, submission of original bank statements and payslips will also assist in accurate borrower identification.
Amount of Deposit
In the past when house prices were rising, lenders were happy to lend 100% of the value of the property as a mortgage, and in some instances up to 125% of the property value where 95% would be secured mortgage with the balance as A personal loan at the same rate of interest.
With world economies fall towards recession, and the ungoing restrictions in credit, the maximum mortgages available are 90% of the property value, with rates and charges being high. To obtain any sort of reasonable mortgage rate, a deposit of at least 20% to 25% is now required, with the very best rates being available at 60% of the property value with the requirement for a 40% deposit.
Whilst this is not generally a problem for second time buyers who already have equity to transfer to their new purchase, it has meant that many first time buyers have to delay plans to buy or have to borrow the deposit from a third party, often from parents Or by means of an unsecured loan. People who can not meet the deposit requirements of main mortgage lenders now find themselves unable to purchase.
If the borrower has an equity stake in the property, the benefits to the lender are as follows –
- If the tenants have a stake in it, the property is more likely to be looked after.
- A deposit shows that the borrowers are people with the self-discipline to save money and have a sense of commitment to the property.
- If the property were to be repossessed, there would be an equity value available to pay the necessary bills in order to ensure that the lender does not lose out financially.
The benefits to the borrower could have summed up as follows –
- The main benefit for the borrower in having an equity stake in the property is that the monthly mortgage payment will be less, and in many cases will ensure no high percentage lending fee is applied by the lender.
- If a reasonable deposit is available, borrowers will also have a much wider choice of lenders willing to consider a mortgage application more favourably.
Someone who has 'job hopped' over the years and has no real track record will be viewed by the lender differently than someone who shows a steady career development with one or two employers over a number of years.
Most lenders look for someone whose skills are always likely to be in demand, and who demonstrates historic stability in employment. Those who have hopped from one job to another with no real track record will be viewed differently by the lender than those showing a steady career development with one or two employers over a number of years.
As well as checking income, most lenders carry out independent checks to verify the borrower's 'creditworthiness' thus reducing the incidence of fraudulent applications.
Existing mortgage reference
The new lender can often ask for a reference, where the borrower has an existing mortgage. This ensures that there are no arrears and that the borrower has paid installments in accordance with the conditions of the loan.
With mortgage arrears, the lender may reject the loan application outright or continue to consider the application, depending on whether the borrower has disclosed the arrears and provided an appropriate disclosure.
With first time buyers who have been renting the lender may wish to write to the landlord to verify that the rent was paid according to the terms of the lease which can confirm the borrows affordability and the ability to pay a mortgage payment.
Nowadays, there are many independent organizations that can provide information about prospective borrowers, such as Equifax and Experian . Such agencies have a bank of information stored according to address or full name. In exchange for a fee, they will provide the lender with details of the credit arrangements which have been recorded against the disclosed address or name. The many institutions providing credit inform these agencies of borrowers' details and the loans granted to them. Therefore, anyone else providing credit can check the existing loan details and also check whether there are any arrears or County Court Judgments (CCJ's) recorded against the borrower concerned.
A prospective borrower who has had arrears or a CCJ recorded against him / her will not be considered favourably by any lender. Often, the unpaid previous debt could have arisen as a result of a moral break-up where none party has agreed to pay the bills, and so a judgment is ever recorded against the property. Although the individuals may have satisfied this debt some time later, the actual judgment stands on record for some time.
Borrowers will have a Letter of Satisfaction if the CCJ has been discharged. If it is discovered that a potential borrower had previous mortgage arrears or a CCJ recorded against him / her, full details of the problem would need to be given; Ie dates, amounts involved and full details of the circumstances in which the problem isose. If a CCJ is involved, it must be clarified if it has been satisfied, and a copy of the Letter of Satisfaction will need to be provided for the lender.
The lender carries out a bankruptcy search shortly before loan completion in order to ensure that the borrower is not an undischarged bankrupt who, as an individual, would be unable to enter into any contracts for substantive credit and would not have any power to borrow money.