Although you have sufficient cash to pay as a down payment while buying a new home, you must carefully weigh up if you can afford to pay down the debt. A mortgage is a long-term loan. It will tie you up for a long period of time, say 10, 20 or more years.
Your financial situation can be different throughout the term as emergencies can crop up at any time, such as losing your job or coming across a medical emergency. Even in such scenarios, you should be able to deal with your mortgage payments.
You will likely be elated to see your dream of getting onto the property ladder coming true, but it requires much effort.
Essential steps to pursue as a first-time home buyer
Here are the preliminary steps before you take out a mortgage.
- Grow your savings
You should grow as many savings as possible. It is generally assumed that a first-time home buyer needs as little as 5% of the market value of your property. However, the fact is that most of the lenders would want you to have at least 10% of the property value as a deposit.
Financial experts usually recommend saving a lot of money as a deposit, probably up to 20%, as it reduces the loan’s value. Hence, you qualify for a mortgage at a lower interest rate.
To grow your savings, you need to know what value of the property you can afford to buy and then estimate what would be 20%, not to mention you will have to stash away a little more money to offset the impact of inflation.
Look over the incomings and outgoings so you know your savings. Apart from setting aside for emergencies, you should now keep aside the deposit. Whether or not you have saved money after meeting all your expenses, you will have to whittle down your costs to grow your mortgage deposit quickly.
- Know your credit score
A mortgage is not like an emergency loan or something like a quick loan with no guarantor that you are eligible for despite a bad credit rating. These are long-term loans. Undoubtedly, a lender would want you to have a good credit rating. Multiple factors include your income, which a lender would want to look at your eligibility for a mortgage.
Although it is secured against property, a lender would want their money back. They would certainly not get into the hassle of the auction, and therefore, having a good credit score is essential to getting the nod.
You can get a free copy of your credit report once a year and try to get it from all three credit reference agencies, as you never know whom your lender would consult.
Make sure that your report does not consist of errors. Try to make payments on your debts on time. Do not delay the payments of rent, utility bills, phone bills, etc., as they can affect your credit rating.
However, availing of quick loans can be beneficial as these are paid back in fixed monthly instalments. Besides, you can improve your credit score provided the loan is repaid on time. Make sure your credit score is good at the time of putting in a mortgage application.
- Get pre-approved
If you have already saved a considerable amount of money, you should try to get pre-approval from a lender. It will indicate that you are serious about buying property, and realtors would consider you seriously.
You can obtain pre-approval from several lenders without fearing the loss of your credit score. It indicates how much money they would be able to give you, interest rates, terms, and so on.
However, note that they will make this decision without running a hard credit check, so you cannot be sure about these details. When you apply for a mortgage, they will peruse your credit report, including your repayment capacity and future ability to make payments in case of an emergency, and then decide if money should be lent to you.
Even if you have the pre-approval, there is no guarantee that you will be signed off on.
- Look after your family finances
You need to care about this when you apply for a mortgage with another applicant, too, like your spouse. Because you two are involved in the application process, a mortgage lender will look at your credit file and repaying capacity.
It is good if both of you have an excellent credit rating. However, if you have a less-than-perfect credit rating, the chances for qualifying for a mortgage are still good, provided your co-applicant has a stellar credit rating.
However, joint mortgages are not just common in people with bad credit ratings. These loans are popular because of a higher approval rate. A lender would find it less risky because you both are responsible for making payments.
Try to get a pre-approval letter from a lender to know how much money you can borrow to get onto the property ladder.
If you take out a mortgage the first time, you may not be clear of thoughts in your mind. You need to be prepared apart from having a deposit size.
First off, you need to check if your credit rating is good. If not, try to have it improved by the time you apply for a mortgage application. Consider applying for it with a co-applicant.
Get a pre-approval letter beforehand, so you know how much it will cost you in total.
Williams Adams is the Senior Content Writer and Loan Advisor at Loansevents. He is passionate about finance writing and has written thousands of blogs for the top platforms worldwide. In more than 13 years of experience, he has worked with leading lending firms in the UK providing various loans. At Loansevents, Williams does the major task of writing researched-full blogs on multiple loans and financial concepts. He has done MBA in Finance in the UK to back his finance skills.