First Time Buyer – The Guide
Buying your first property can be a scary task but an exciting one! With the right knowledge and advice you can make the process as stress free as possible.
We have asked our mortgage team to put together a handy guide to help explain the processes involved in buying a property for the first time.
The word mortgage is a French legal term meaning “Death Pledge”, but it’s not as scary as it sounds! A mortgage is simply the act of borrowing money against an asset, most commonly a property.
The idea is a lender can feel comfortable to lend what is typically a large sum of money as they will have the right to sell the property if you do not follow the terms in the agreement; this is known as ‘security’. Because they have this security there is less risk associated to lending the money so the interest rates can be more favourable.
When purchasing your home there is a process which is best practice to follow, we will go into each part in more detail throughout this guide: Affordability > Decision in Principle > House Hunting > Full Submission > Valuation/Survey > Mortgage Offer > Exchange/Completion
Affordability [link to our online affordability calculator]
The first step all home buyers take is to check their ‘Affordability’, in simple terms this is working out how much money you can borrow by way of a mortgage.
Each lender has a completely different approach to working out what the maximum mortgage amount they will lend you. Your Mortgage Adviser will help guide you through this maze accurately but as a general rule of thumb and a good calculation to work from…
Take your income let’s say £25,000 add your partners income £15,000 = £40,000 and multiply by 4 = maximum mortgage amount of £160,000 (this is an example and some lenders may be prepared to consider more)
Now if you have any credit cards or loans these will need to be taken into consideration as well. Lenders are more interested in your monthly spending than your balances. For example if you have a personal loan of £5,000 which you are spending £200 a month on you would need to take the monthly payments and multiply this by a year’s worth of payments £200 x 12 = £2,400. Take this income from your total joint income as above = £37,600 again multiply by 4 and your new maximum mortgage = £150,400.
When taking credit cards into consideration lenders have different criteria’s, some will take 5% or 3% of your balance others will take your current minimum payment but again your adviser will guide you through this.
Please note this is just to be taken in general, some lenders will give you more and some will give you less and this would all be worked out accurately for you by your Adviser.
The maximum mortgage a lender will give you and what you can really afford are usually two different things, over and above these calculations you still have to pay Council Tax, Utility Bills, TV Licence etc so it’s always best to write down everything you expect to spend each month on the necessities and then set yourself a monthly budget for the mortgage, life assurance & buildings and contents cover.
Remember that you still need to live your life! Budget for holidays, hobbies and fun, you want be able to enjoy your new property not be imprisoned by it… granted this is easier said than done with house prices being the way they are but start of on the right foot and keep your expectations reasonable.
Decision in Principle
You have worked out how much you can afford and you know how much of a deposit you can put together now is the time to see if your dreams can become a reality.
At the DIP stage your adviser would have looked at all your needs, wants and circumstances and have a good idea about what direction you will be taking. The DIP is not legally binding by any means and is just to be used as a process to let you know if any mortgage lenders would be happy to lend you money.
Your adviser will put a limited amount of your information to the chosen lender for them to assess your circumstances and make sure you are worthy of their money.
They will check with credit referencing agencies such as Experian and Equifax to see if you have any negative credit history. It is always best to be completely upfront and honest with your mortgage adviser as even if you do have anything like a county court judgement or have missed payments on credit cards there are still specialist lenders that may be able to help.
You may have heard that having lots of credit searches done against you is bad for your credit score… this is in some part very true. If you have applied for 5 personal loans in a short space of time it would appear to future lenders that you are credit hungry and not in a good financial place. In most cases with decision in principles the lender will only conduct what is called a ‘soft search’ this means that the only people that will see this search has ever been done is you and the lender who completed the search, meaning it has no negative affect on your credit score. This is because mortgage lenders know that you are likely to have decision in principles with a number of different lenders and also this is seen as you dipping in your proverbial toe and it is not an out and out application to borrow money.
Once your DIP has been accepted most lenders will provide you with a document, if they don’t offer this service your adviser will be able to confirm in writing for you. A DIP is an indication that they will be happy to lend you money provided information that has been given can be confirmed and that the property you intend to purchase is suitable. It is not a promise of a mortgage, but a good indication that they will be happy to consider the application as favourable.
Now the fun bit! You know how much you can afford, you have a decision in principle certificate in hand and it’s time to start the search for your perfect first home.
The internet has made house hunting so much simpler and with websites such as Rightmove, Zoopla and Property Finder as good as every property that is currently on the market can be found there. If you own a smart phone its worth downloading their apps as it makes browsing for homes very easy.
Once you have found a property you like and wish to put an offer in always let the estate agent know you have a decision in principle already and your mortgage is lined up. This puts you in a much stronger position than other perspective buyers and gives you a fighting chance with your negotiations.
Congratulations! You’ve had an offer accepted on your first property and are now ready for your mortgage application to get underway.
Your adviser will take the lead in this process and will act as a middleman between you and the mortgage lender saving you the time and hassle of dealing with them as well as using their expert knowledge and relationships to speed things along..
During this stage you are pretty much proving everything you said in the decision in principle stage is true. Lenders will expect you to prove who you are through ID verification, where you live via proof of address and will request you prove your income.
Once they have all the information they need and are happy with everything they will instruct the valuation.
Valuation / Survey
Making sure the property you are buying is up to scratch and isn’t going to fall down any time soon should be treated as a priority, as getting it wrong could cost you a fortune. There are three types of survey you can choose between and each has a different level of service and a different price tag… [please click this link to go to our blog breaking down the various types of surveys]
Once the valuation has been assessed by the lender they will complete their final checks and release the mortgage offer.
This is not a legally binding document and you can still pull out of the purchase if you so wish but the offer is the final piece of the mortgage puzzle.
The mortgage offer is a formal document stating the terms under which the lender is now happy to lend you the money to buy your home. Always give this a good read and check that everything is exactly how you want it to be.
Exchange / Completion
Your Conveyancer will pick up the reigns from here and will guide you through the process of exchanging contracts and all the way through to completion.
If there is a chain of properties it is the Conveyancers job is to work with the other members of the chain to ensure all completions take place at the same time.
Your first mortgage payment can be due immediately when you move in depending on the lender, but your Conveyancer will advise you on this.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of Fordyce & Playle Limited. All comments are made in good faith, and neither Fordyce & Playle Limited nor the author will accept liability for them. No advice is given in any posting. Please contact your Financial Adviser for more information or advice.