The process of applying for a mortgage doesn’t have to be a source of fear or anxiety. The problem is that most people simply don’t know what to expect. That’s why we’ve composed this guide to walk you through the process, helping you to understand the key stages and know what your options are before you get started.
What is the mortgage process?
Finding the home of your dreams should be a joyful time. Full of hope and promise, not uncertainty and worry. But when you’re preoccupied with getting a deposit together and wondering what monthly mortgage payments you’ll be able to afford, it’s easy to lose sight of the positives.
When you know what’s coming at every stage of the process, it feels less overwhelming. It also helps to know what you can afford ahead of time and get a realistic idea of how long things take to get done.
It can be time-consuming to take out a mortgage, depending on your situation. It’s never a good idea to leave it to the last minute. If luck isn’t on your side, you could find that when you finally get to the stage where the funds are available to secure the property you want, another buyer has already snapped it up, purely because they prepared themselves in a more organised and efficient way. By learning about the process, you make it easier to get started sooner. You will also get a strong idea of what’s in store over the next few months, enabling you to plan more effectively for your future.
Here are the 6 key stages to a successful mortgage application:
- Preparing to apply
- Submitting the initial application
- Lender’s assessment and affordability calculations
- Formal valuation
- Mortgage offer
1. Preparing to apply
Before you submit an application, you need to make sure your finances are right. Obtain credit reports from 3 leading independent bodies to see if anything comes up that might deter a lender. If you believe there is an error in your credit report, contact the agency so that they can amend it as soon as you can. Many lenders will have issues with you not being on the electoral roll, if you have missed payments on a credit commitment in the past, or if you have more serious credit issues like defaults or CCJs.
Assess your credit score alongside your financial situation. Are you confident about being in the right place to apply for a mortgage? Bad credit can have a significant impact on the options available to you, so consider whether it might be best to work on improving your credit rating before trying to obtain a mortgage. Think Plutus can help you assess your circumstances and advise on whether now is the right time for you. We can also recommend some things you can do improve your situation.
You will find there is lots of jargon involved when you start your research. If you’re new to the mortgage market, here’s an explanation of a few key terms:
- Mortgage type (fixed, variable or tracker): This is the interest rate that comes with your mortgage. Fixed-rate means it won’t change, while a variable interest rate can move up and down. Tracker rates are a kind of variable interest rate usually linked directly to the base rate from the Bank of England.
- Initial rate: This is the interest rate you’ll pay at the beginning of your mortgage term before any introductory offer ends.
- Monthly repayments: The amount you are required to pay each month to pay off your mortgage once your contract begins. It is based on the overall mortgage term, your method of payment and the interest rate on the mortgage product.
- Mortgage duration: This refers to the time period for which your introductory offer is valid. For example, you may have chosen a product with a rate that’s fixed for an initial period before becoming variable.
- Scheme fees: This refers to the charges you must pay for arranging the mortgage. The costs involved include arrangement, property surveys and valuations. In some cases, these charges won’t apply, while in others it can cost anything up to approximately £2,000, depending on the deal you’ve chosen. Note that you will also have to pay stamp duty on anything above £125,000, or £300,000 if you’re a first-time buyer.
2. Submitting the initial application
Once Think Plutus have assessed your circumstances and found the ideal mortgage for you we will get your confirmation that you want to proceed. The first step is to contact the lender for a Decision in Principle (DiP). This initial step is not the full application but it is the first contact in which we tell the lender all the important information about you. The feedback is called a Decision in Principle, or an Agreement in Principle, and will give you an idea of how much you could be offered subject to full application, underwriting and a formal valuation of the target property. In essence, it is a promise that your mortgage application will be accepted provided all the information you’ve given is accurate and can be confirmed. Read on to learn about DiPs in more detail.
Once the DiP is secured, Think Plutus will start working on compiling your formal application. We will take you through all the information we need, including the documents that will be required by the lender. Your adviser will go over everything with you before sending anything to the lender. We will check your documents over before processing them and your application will be forensically checked before it is submitted to the lender on your behalf.
3. Lender’s assessment and affordability calculations
Once Think Plutus has submitted your application, the lender will begin the process of underwriting every detail. They will need a lot of supporting documents for your application such as payslips, accounts, bank statements, etc. They may also request further documents whilst the application is being processed. It’s not uncommon for a fair amount of back and forth to occur at this stage, and Think Plutus will liaise with the lender on your behalf. We will keep you updated on the status of your application so you’re never left wondering how it’s going.
At this stage, lenders will perform an affordability assessment that’s commonly known as a ‘stress test’. This involves establishing how much disposable income you have after all your regular outgoings to assess what monthly payments you could afford. They will take the possibility of a rise in interest rates into account. This process is done to protect both the lender and the borrower in the long-term.
4. Formal valuation
The lender will arrange a formal survey that will confirm the value of your target property and its suitability for a mortgage. This valuation is entirely for the benefit of the lender.
From time to time, a property is found to be in need of repairs, or the price being asked is seen to be too high. When a survey makes discoveries such as these, it may be possible to negotiate a lower price with the vendor. As a general rule, lenders will look at the property’s size and condition and compare with similar properties that sold recently in the local area. Every lender will have their own approach to the valuation process, but this is broadly how it works.
You will be required to pay for this valuation when the full application is submitted to the lender – not at the DiP stage. Think Plutus will explain this to you upfront so there won’t be any nasty surprises.
5. Mortgage offer
Once you pass the affordability checks and the property has been formally valued, the lender will give you a legally binding mortgage offer. If arrangement fees are not added to the mortgage as part of the deal, and you haven’t already paid these fees, then this is the stage where you will be required to pay. Some lenders will deduct arrangement fees from the mortgage amount they send to your solicitor – Think Plutus will advise you on this in advance so you are fully prepared.
In some cases, you must take at least 7 days or more to make a decision on whether to accept the mortgage offer, but plenty of lenders skip this step. The assumption is that if you use the mortgage to finalise the purchase of a property, you’ve accepted the mortgage offer. The mortgage application can be cancelled at any time up to the point that contracts are exchanged, after which both parties are legally bound to proceed to the completion stage. You may lose money if you cancel, depending on what stage of the process you are at. If you’ve already paid for a survey, for example, you won’t get that money back if you put the brakes on the process.
Once the mortgage offer is accepted, your final 2 actions are signing the contracts and transferring your deposit. Your solicitor will arrange the appointment to sign contracts and confirm the transferal of your deposit.
Decision in Principle explained
The DiP is also known as an Agreement in Principle (AiP) or a ‘mortgage in principle‘. It is an agreement from a mortgage lender that they will provide a certain sum of money on the condition that the information provided to them is accurate and verifiable. As your adviser, Think Plutus will pass on information on your address history, your income and any ongoing credit commitments you have. This gives them all they need to perform a quick credit check and obtain a credit score to calculate a provisional amount they could offer. This initial application will be vetted by an underwriter, and will be accepted or declined on the basis of their findings.
A DiP should not be entered into lightly. Credit checks will be carried out by the lender which will leave either a soft or hard footprint on your credit file. While a soft footprint will not impact your credit score with subsequent lenders, having multiple hard footprints can be detrimental. You may find that fewer mortgage deals are available to you. This is why it’s important to speak to an expert adviser who can explain everything to you in detail and ensure you apply for a DiP with the right lender.
Requirements for a mortgage
Mortgages almost never cover 100% of the purchase price – you will be required to put down a deposit on the property to make up the difference between the purchase price and the mortgage amount. Lenders will want you to pay an absolute minimum of 5% of the property price, though it is far more common to need a deposit of 10% or more.
Your lender also needs lots of documentation to carry out their assessments for your application. They have to verify your identity and make an accurate assessment of whether you will be able to afford your mortgage repayments. As such, they will need identification documents and evidence of your income and financial circumstances.
The documents they are likely to ask for include:
- Proof of ID (passport, birth certificate, etc.)
- Proof of address (driver’s license, utility bills, etc.)
- Proof of earnings (payslips, tax documents, etc.)
- Proof of income and outgoings (bank statements, credit card bills, etc.)
Your lender needs to feel confident that you will consistently keep up with mortgage payments. This means they will assess whether changes in the interest rate will affect your ability to pay. In checking your finances, lenders are likely to assess the following areas:
- Employment status
- Salary and other sources of income
- Regular expenses and spending habits
- Ongoing credit commitments
- Debts and credit issues like defaults
- Additional financial commitments like childcare or school fees
How long does a mortgage application take?
There is no single answer to this question. The amount of time a mortgage application takes will depend on your circumstances and the speed of the lender. In some cases, a mortgage could easily be arranged in 2 weeks, but this won’t always be possible. If your situation is complex, there could be a lot of back and forth with the lender, and if any issues arise like findings during the valuation survey then things could be delayed. As a point of reference, you should plan for the application process to take approximately 4 weeks. Once we have more of an idea of your situation, Think Plutus will be able to provide a timeline more specific to your circumstances.
When you come to Think Plutus for independent mortgage advice, our goal is to remove the stress that many people associate with taking out a mortgage. We have whole-of-market access, with more than 100 lenders at our disposal, and our expert team will handle the entire process on your behalf. From application through to completion, we will be in your corner.
Our expertise enables us to retain greater control over the application process and we’ll keep you updated throughout. The legal aspects will be handled by your solicitor, who will be heavily involved once the mortgage offer is made. Even as the money is prepared for completion, we will still be on hand to answer your questions and support in any way we can. For mortgage advice that lets you focus on the joy and optimism of a new home, Think Plutus.