Not all mortgages are created equal — they vary considerably, depending on who is seeking the loan, who is providing the loan and what property the loan will cover. There is such a thing as a bad mortgage, which will harm you more than it helps; it will cost you too much over the lifetime of the loan, and it will be difficult to pay off safely and successfully.
Fortunately, there is such a thing as a good mortgage, which will help you acquire the home of your dreams and keep you financially (and emotionally) balanced. So, where do you find the good mortgages, and how can you get one for yourself? Read on to find out.
- Know what lenders require from you
- Does your credit score matter?
- Understanding what you want from your mortgage
- Use a no-fee broker for the best deal
Mortgages are highly personalised financial products generated with a standard set of information. No matter what kind of lender you approach, you will need to submit the same type of information, so the lender can calculate the level of risk associated with offering you a loan. If you seem unlikely to pay off the loan, you’ll get a bad mortgage or even refused one; if you seem like a reliable and responsible person, you’ll get a good mortgage.
You can begin amassing the materials for mortgage applications at any time. Some of the details lenders always ask for include:
The older you are, the more likely you are to have a stable, well-paying job and the more likely you are to understand the importance of paying your bills on time. Younger people (low 20s or less) often struggle to get a loan for several reasons. However, if you’re nearing retirement and want a mortgage for 25 years, lenders may worry that you won’t pay it all back before you die in older age. There are other mortgage types, called equity release or lifetime mortgages, specifically for the over-55s.
Your income and job stability
Your lender will ask you dozens of questions about your working life, such as how long you have been in your current position, your pay after benefits and taxes, any plans to switch jobs or careers, etc. Not only does this information tell the lender what you can afford, but it helps them develop a picture of your dependability.
Your current debts
Debts include things like student loans, credit cards, car payments and business loans. Lenders typically want a debt-to-income ratio below 36 percent, meaning that less than about one-third of your income is eaten up by debts. Some less-scrupulous lenders will accept ratios as high as 43 percent, but you will need to jump through other hoops for approval, such as having a much larger deposit or getting a guarantor mortgage.
Your credit score
Credit reports collect all your previous lending history and aggregate it into a neat and tidy score. To qualify for a good conventional loan, you (and your partner, if you’re applying for a joint mortgage) need a credit score above 620, which you earn by having a long history of on-time payments and low balance usage.
Before you apply for a mortgage, you should have a healthy savings account to use for your down payment. A good loan requires 20 percent of the value of the home as a down payment, but the more you can put down, the better your loan will be.
With this information, lenders calculate your home loan rates, or the percentage of interest you will need to pay every month. They will offer you a few different rates, depending on what kinds of loans you qualify for. From here, which loan is good for you depends largely on what you want and need. Thus, it is important that you…
Yes, yes, and YES!
If you know you want to buy a house at some point, but need several years to save your deposit, start fixing your credit record NOW.
It can take six years for defaults and marks on your credit report to stop mattering to some lenders. Even one late mobile phone bill payment two years ago could negatively affect the interest rate you get on your mortgage.
The good news is that you’ve got plenty of ways to raise your credit score. Read our credit score boosting tips here.
There is no one-size-fits-all mortgage; different mortgage products are available to suit the highly variable needs of different homebuyers. Long before you apply for a mortgage, you should be thinking about your hopes and dreams as a homeowner, so you can better identify the right mortgage for you. Some questions you might ask yourself include:
Where is the property?
Home location affects many aspects of the mortgage process, most significantly the amount of the loan but also some risks associated with the home purchase. Ideally, you should choose a lender that has experience with properties in the area in which you expect to buy.
What is the property like?
A larger home will always be more expensive, requiring a larger mortgage. However, you should also consider what kind of home you want, such as new construction, historic home, fixer-upper, etc. Each has its own financial risks to consider when acquiring a mortgage.
How long will you stay in one property?
This is a concern that many homebuyers neglect. If you expect to upgrade to a bigger or better property in just a few years, you might pursue an adjustable-rate mortgage, which tends to have rock-bottom rates for a few years before spiking. However, if you anticipate this property to be your forever home, fixed-rate is for you. Read more about mortgage types here.
Get a good mortgage by using a broker! Opt for a ‘no fee broker’, though. These companies are set up to help your best interests – not those of the lenders they’re tied to.
You’re unlikely to find the best mortgage deal by going to a high street bank or lender direct. Mortgage brokers have access to thousands of special broker-only deals, often shaving thousands of pounds of the high-street equivalent. A no-fee broker gets a commission off the lender you choose – but it doesn’t cost you anything to go via the broker yourself. The fee is wrapped up in the total mortgage cost – and is still much cheaper than negotiating direct with a lender. Brokers also help you complete your mortgage application – reducing the risk of small errors causing a refusal, and speeding up the process.
We partner with leading brokers London & Country to offer you a no-fee mortgage service. Click here for free impartial advice – and find out more about why we choose to partner with them here.