The mortgage process can be daunting, especially for first-time home buyers. In Preston, where the property market is competitive, securing the right mortgage can be the difference between getting your dream home and missing out. Understanding how the mortgage application process works, what lenders look for, and the criteria they use, such as income, deposit size, regular expenditures, and credit ratings, can make all the difference. Providing specific financial details, like your income and expenses, is also crucial in estimating the mortgage you might qualify for.
In this guide, we’ll walk you through the key things you need to know before applying for a mortgage, providing valuable insights for Preston buyers.
1. Understanding Mortgage Affordability
This is a crucial factor to consider when buying a home. It refers to the amount of money you can comfortably spend on a mortgage each month. To determine this, you’ll need to consider several factors, including your income, debt, credit score, and other financial commitments.
Lenders calculate the amount you can borrow by using a debt-to-income ratio (DTI). This ratio measures your total monthly debt payments against your pre-tax monthly income. A lower DTI ratio indicates to lenders that you have the financial ability to handle your mortgage repayments.
The 28/36 rule states that you shouldn't spend more than 28% of your gross monthly income on home-related costs and no more than 36% on total debts.
In the UK, lenders typically offer mortgages for at least 4.5 times your income. However, this can vary depending on the lender and your individual circumstances. It’s essential to use a mortgage calculator to get an estimate of how much you could borrow and to compare different mortgage options.
When calculating your how much you can afford, you should also consider any unexpected costs beyond mortgage payments, such as living expenses, insurance, and maintenance costs. These costs can impact your ability to comfortably afford your mortgage payments.
2. Know Your Budget: What House Can I Afford?
Before even starting the mortgage application process, you need to figure out how much you can borrow and how much you can comfortably repay, considering your individual comfort levels with financial decisions. Lenders will assess your income, debts, and credit score to determine how much you can afford. They will also evaluate your credit rating alongside other factors like income and deposit size to decide on the amount you can borrow or if lending will be approved. Keep in mind that every lender has different ways of calculating how much they will lend to you.
Key Considerations:
- Mortgage in Principle: Before viewing homes, it’s a good idea to get a Mortgage in Principle. This will give you an estimate of how much a lender is willing to offer based on your financial situation. For example, higher income multiples may apply for certain professions, which can affect the amount you can borrow. It also shows sellers that you’re a serious buyer.
- Deposit: Typically, a deposit of 5–20% of the property’s value is required. The more you can put down, the better the terms you’ll be able to negotiate.
- Affordability: Lenders also consider your monthly income and expenses when calculating how much you can afford. Ensure you have a clear idea of your monthly budget before proceeding. Factors such as salary and debt-to-income ratios will determine if you qualify for a mortgage and under what terms.
3. Choose the Right Type of Mortgage
Most lenders typically allow you to borrow between 4.5 and 5.5 times your annual salary for a mortgage. There are numerous mortgage products available, and it's crucial to understand these different options before applying. Some of the most common types include:
Taking the right steps in choosing a mortgage can significantly impact your financial future.
Fixed-Rate Mortgages
A fixed-rate mortgage offers an interest rate that remains consistent over a predetermined period, usually 2, 5, or 10 years. This stability provides predictable payments, making it an excellent choice for buyers who prefer to plan their finances over the long term.
Variable-Rate Mortgages
Variable-rate mortgages are tied to an interest rate that can change. This means the amount you pay can fluctuate depending on changes to interest rates, affecting what you will be paying each month. Although they may offer lower initial rates, they can be riskier if rates rise.
Interest-Only Mortgages
With an interest-only mortgage, interest on the loan is only for a set period, typically 5–10 years. After that, you’ll begin repaying the principal. These mortgages are typically offered to borrowers with large deposits or those buying high-value properties.
Help-to-Buy Schemes
In Preston, first-time buyers may be eligible for government schemes like Help to Buy or Shared Ownership, which can help you get onto the property ladder with a smaller deposit.
Additionally, it's important to consider the Stamp Duty Land Tax, which applies to properties in England and Northern Ireland, as it can impact the overall cost of purchasing a home.
4. Your Credit Score Matters: How to Improve It
Your credit score plays a crucial role in the mortgage application process. It shows lenders how you’ve managed debt in the past and helps them determine how risky it is to lend to you. The higher your credit score, the better the mortgage deals you’ll be able to access.
How to Improve Your Credit Score:
- Pay your bills on time: Payment history accounts for a significant portion of your credit score.
- Check your credit report for errors: Mistakes can drag your score down. Check your report regularly to ensure all the information is correct.
- Keep credit card balances low: High credit card debt can negatively impact your credit score. Try to keep your credit utilisation under 30%. Working on reducing your balances can significantly improve your credit score.
5. Gather the Necessary Documentation
Once you’ve chosen a mortgage lender and are ready to apply, you’ll need to provide various documents to support your application, including specific financial details such as income and expenses. These include:
- Proof of identity: Passport, driver’s license, or other government-issued ID
- Proof of income: Payslips, bank statements, or self-employed income records
- Bank statements: Lenders want to see a history of your financial activity over the past 3–6 months
- Credit history: Lenders will review your credit report to understand your borrowing history
- Deposit proof: Evidence of your deposit, such as bank statements or gift letters if the deposit is a gift
Having all the necessary documents ready will streamline the process and improve your chances of approval.
6. The Mortgage Application Process
Now that you’re prepared, it’s time to take the necessary steps to submit your application. Here’s what to expect:
Step 1: Submit Your Application
Your lender will ask you to complete a mortgage application form, where you’ll need to prove detailed information about your finances, employment, and the property you wish to purchase.
Step 2: Valuation
The lender will arrange for a valuation of the property to ensure its value aligns with the amount you’re planning to borrow. If the property is valued too low, the lender may refuse to offer you the full loan amount.
Step 3: Approval and Offer
If the lender is satisfied with your application, you will be offered a mortgage. This outlines the loan amount, interest rate, and terms of the mortgage.
Step 4: Exchange and Completion
Once you have your mortgage offer, your solicitor will exchange contracts with the seller. After the completion date, the funds will be transferred, and you can move into your new home, taking on the financial responsibilities associated with owning a home.
7. Other Costs to Consider Beyond Mortgage Payments
When buying a home, it’s essential to consider every costs beyond mortgage payments. These costs can include:
- Living expenses: You’ll need to factor in the cost of living in your new home, including utility bills, council tax, and food.
- Insurance: You’ll need to consider the cost of building insurance, contents insurance, and life insurance.
- Maintenance costs: As a homeowner, you’ll be responsible for maintaining your property, which can include costs such as repairs, replacements, and renovations.
- Other debt: You’ll need to consider any other debt you may have, such as credit cards, car loans, and student loans.
- Savings: It’s essential to have a savings cushion in case of unexpected expenses or changes in your income.
To comfortably afford your mortgage payments, you should aim to spend no more than 28% of your gross monthly income on housing costs. This includes your mortgage payments, property taxes, and insurance.
It’s also essential to consider the impact of interest rate changes on your mortgage payments. If interest rates rise, your monthly payments could increase, so it’s crucial to factor this into your calculations.
By considering these costs and factors, you can get a more accurate estimate of how much house you can afford and make an informed decision about your mortgage options. A good rule of thumb is to have at least three months of payments in reserve as an emergency fund.
8. Common Mistakes to Avoid When Applying for a Mortgage
When applying for a mortgage in Preston, avoiding common mistakes can save you time, funds, and stress. Some mistakes to watch out for include:
- Applying for multiple mortgages at once: Too many applications can negatively impact your credit score.
- Failing to budget for other expenses: Don’t forget to include costs like stamp duty, surveys, and legal fees in your budget.
- Overextending yourself: Be realistic about what you can afford — don’t stretch your budget too thin.
- Risk of repossession: Failure to keep up with mortgage repayments can lead to your home being repossessed. Consider your financial commitments seriously to avoid this risk.
Why Choosing the Right Mortgage is Crucial
Getting a mortgage in Preston can feel overwhelming, but selecting the right mortgage product and proper advice and preparation can make the process much easier as buying a home is one of the biggest investments you will make. At Key & Frame, we offer free advice and help you navigate the process, from choosing the right mortgage to securing your property. We can also put you in touch with local, trusted mortgage advisors who understand the Preston market and can give you a rough idea of what you can afford.
Ready to Buy Your Home in Preston?
At Key & Frame, we understand how daunting it can be to secure the right mortgage. If you’re ready to start your property search or want advice on off-market homes in Preston, we’re here to help. Contact us today to get started on your home-buying journey. Visit our online resources for detailed information and tools to help you understand loan specifics and calculate your estimated monthly payments.
