The mortgaging process can be confusing for new applicants. Between the terms and the lengthy procedures, it can be hard to navigate the maze that is home ownership. In our previous three articles we began the process of demystifying the overwhelming nature of mortgaging. For this final article in the series, we hope to tidy up some points and conclude our explanation of the preliminary steps to getting a property loan.
Now, if you’re planning on taking out a loan to buy a house in the near future, here are seven things you need to learn about, and do, to make sure that the transaction goes smoothly and that you fully understand what you’re getting into.
1. Check your credit score
Lenders always checks the credit score of their mortgage applicants, as a person’s credit score can reflect how creditworthy they are. It is no wonder it influences so strongly the outcome of any loan application. While it is true that a low credit score doesn’t necessarily translate into a denied application, it does assuredly result in higher repayment rates. Consequently, it is always our advice that you check your score and report for any errors or caution flags.
Two of the common errors and caution flags are:
Incorrect address and,
Wrong associations: this may include previous partners or friends that might have been joined to your bank account.
2. Do your homework: learn the different types of mortgages
In an earlier article, we explained the different types of mortgages that are common in the UK. We recommend that you review this article whenever you need to know what the different mortgages are. Until then, please take note, that the type of loan you choose can determine your repayment rate and term, and it’s for this reason we believe it is crucial for any buyer to fully understand their choices of mortgage.
3. Decide on the mortgage you can realistically afford
Prior to securing a mortgage it is good to have a budget that accounts for the following factors:
- Mortgage principal
- Mortgage interest
- Mortgage Down payment
- Mortgage fees and closing costs
- Property taxes
- Building and content insurance where applicable
- Utilities (electricity, water, gas, cable, internet, etc.)
Home ownership can result in a financial disaster if it isn’t properly planned for. If after you create your budget, you find that your finances will be a stretched, it’s best not to proceed with the purchase. As a rule, you should never spend more than 43% of your income on your monthly debts. Until you are able to abide by that rule, we advise not to buy a house until you can ensure that you can afford it.
4. Shortlist the mortgage lenders whose offers best fit your budget
Different lenders have varying policies. Some charge fees and have penalties that others don’t and some offer services that their counterparts don’t accommodate, for example, some lenders offer capped mortgages . The benefits of such a mortgage can be found in a prior article. Something else to keep in mind when finding your perfect lender is whether or not they will penalise you for paying the mortgage off early. Yes, you read correctly, you can be charged for clearing your mortgage too quickly.
Now, the point that’s being made in the above is that you have to decide on the lenders whose services and fees best suit your circumstances and needs, as finding the best mortgage deals begins with finding the best lender(s).
5. Determine the mortgage term you’re most comfortable with
Choosing the right mortgage term is a vital part of the entire mortgage process. This choice can literally be the difference between a comfortable or compromised repayment. Standard mortgage terms, in the UK, are 25 years, but you can get terms that last between six months and 40 years. Terms that are 20 years or less are considered a short-term mortgage and can result in a higher monthly repayment. Conversely, any term that is 30 years or more is considered a long-term mortgage, and can result in a lower monthly repayment.
Long-term mortgages cost less per repayment because the principle is spread over a longer period of time. However many overlook the fact that a longer-term mortgage results in a lengthier stretch of the loan’s interest rate, thereby making the borrower pay more overtime for their loan. The reverse is definitely true for short-term mortgages.
6. Look into refinancing and second mortgage options
There may come a time when you can get a better mortgage; because interest rates have changed, or your credit improved. In these instances, refinancing a mortgage is a powerful move, and while it may seem premature to account for this now, it is smart to keep this in mind when you shop for a new home. Remember that mortgage schemes are variable and high today and low tomorrow (well not exactly). Anyway, the point is to keep the window open for this possibility.
Similarly, applying for a second mortgage might be necessary in the future. What is the purpose of a second mortgage? A second mortgage is a type of loan that lets you borrow against the value of your home. Your home is an asset, and over time, that asset can gain value. Second mortgages are also called home equity lines of credit (HELOCs) or home equity loans, and are a way to use that asset for other projects and goals without having to sell your home.
Before you shop for a new home or apply for a mortgage, make sure you are able to refinance and use your home as equity. You never know, these options might become necessary for you in the future and it’s best to have access to them than to be in want of them later.Get a mortgage in principle.
The last thing we recommend you to get before you search for homes is a mortgage in principle. This tells you how much money a mortgage company is likely to lend you.
Having a mortgage in principle is useful when you’re searching for houses because it shows estate agents and sellers that you’re serious about buying and proves that you can afford the properties they are showing you.
Summary:
There is quite a bit to look into when it comes to buying a house. Theses seven things are in no means an exhausted list, but a good starting point. If you have any further questions or would like to have a more in-depth discussion about with us, please contact a Percom representative today.