If you’re planning to buy a home, you will likely need to take out a mortgage in order to get the funding you need to make the purchase. A mortgage is essentially financing that’s provided by a bank or lending institution and allows you to purchase something (in this case, your home) that you wouldn’t otherwise be able to afford with cash alone.
In this guide on what you need to get a mortgage, we’ll cover all of the steps that are involved in obtaining a mortgage so that when the time comes, you can be ready to apply!
How Much Can I Afford?
One of your first steps in getting a mortgage is estimating how much you can afford.
To get an accurate picture, you’ll need to go through some basic math and figure out exactly how much income you have, where it’s coming from, and what other expenses (mortgage payments, car payments) will be competing for your resources.
My Credit Score
If you’re buying your first home, you may have trouble getting approved for a mortgage.
If you’ve had credit problems in your past, don’t fret— there are lenders out there that specialize in helping people with less-than-perfect credit scores get their dream house.
And if you have no credit history at all or minimal job experience, don’t worry. It can be done!
Can I Put Down A Deposit?
The initial deposit required for most mortgages is 5% of your property value, but some lenders will allow you to pay slightly more or less than that.
If you’re planning on putting down less than 5%, you should ask whether mortgage insurance will be required.
My Income
Whether you’re self-employed or not, you’ll need documentation of your income in order to get a mortgage.
Your lender will want proof that you earn enough money, and they will also want proof and documentation of your income from prior years if your employment is unstable.
If you’re self-employed, be prepared to submit tax returns for three years as well as quarterly reports for at least two years.
Have I Saved Enough?
While there are many factors that go into being approved for a mortgage, one of the biggest is your down payment.
The larger your down payment, generally speaking, the more likely you are to get approved, as you are taking a greater share of the risk full stop.
If you don’t have any money saved for a down payment, you may have trouble getting approved for a mortgage loan, although there are a few banks and building societies that have restarted doing 100% mortgages again.
Do be aware, that if you do take a 100% mortgage out, then the interest rate is likely to be higher than if you had put a deposit down.
Do I have Other Debts?
Depending on how much you owe, your debt-to-income ratio may be too high, even if you make a large enough down payment.
For example, if you owe £40,000 on credit cards and want to buy a £300,000 house, your DTI would be 67 percent—an amount many lenders won’t accept.
However, your mortgage lender will take other debts into account when calculating your DTI.
The Extras
What you might not know is that in order to qualify for any loan, you’ll need to prove that you have enough money on hand in liquid assets.
A lender will subtract your liabilities and expenses (such as car loans , credit card bills, monthly investments) from your income and add that total with your liquid assets.
If it exceeds 20% of what they estimate your monthly mortgage payment will be, congratulations—you can get a loan! If not, then either pay down some debt or save up until you do qualify.
What You Need to Get a Mortgage - The Bottom Line
Mortgages are the most popular financing option when purchasing a home. There are several different types of mortgage available on the markets, such as fixed, variable, discounted, or buy to let mortgages.
Make sure you understand which ones you are signing up to, and of particular importance is whether the repayment vehicle is an interest only repayment, or an interest plus capital repayment.
The interest only repayment schedule means you will never own your house unless you pay the capital off at the end with a separate investment vehicle.
Whereas the interest plus capital repayment means you will eventually own your house even if that is 25, 30 or even 35 years in the future.