Buying a house and getting a mortgage can be one of the most difficult things to organize, but it can also be an exciting time in someone’s life, and buying a house can be a great asset to help you prepare for old age. However, unless you already have a mortgage it can be hard to know how to apply for a mortgage – the whole process, from pre-approval and submitting personal financial information, to purchase agreement and finally getting to sign the sale contract on the property.
If you are not yet sure are buying a house, look at our home ownership facts vs myths article to answer some of the most common concerns people have.
What is pre-approval?
The initial stage when you apply for a mortgage loan is often called pre-approval. This is where you approach banks or mortgage lenders in order to get the go-ahead saying that you are eligible for a mortgage loan.
Pre-approval is important because it means that you know you can afford to purchase a property, which means that you can continue along the process of buying a house. Pre approval also lets the seller or real estate agent know that you are serious about buying the house.
What do I need for the initial mortgage loan application?
When starting the process to request a mortgage loan, there are some very important bits of information that will help the bank when you are asking to borrow money to buy a house.
The most basic and obvious information is your personal details. such as name, address, social security number, and contact details – all of which you probably know off the top of your head. However, there are some extra details that are vital for when you apply for a mortgage.
These are the house cost / the amount of loan you are asking for, and the details of your income. Let’s look into what this means.
If you want to make a mortgage application, you will need to know how large the loan will be. Getting approval for a certain size of loan shows you what size house you can get financing for, which is very beneficial as it helps narrow down your search.
What if I don’t know the price?
Banks and mortgage lenders can help you get an estimate of the size loan you will be pre-approved for. However, if you have a specific type of property in mind, it is helpful to know the price in order to make sure you can get approved. This means a loan officer can give you a loan estimate of how much deposit you will need and what the interest rates might be.
Does the deposit amount affect this?
The deposit amount affects how much you need to borrow. The higher your deposit percentage, the less money you will have to borrow. Banks are more likely to approve a loan application from someone who has a smaller amount that they need to borrow. Whereas if you have a smaller deposit, your mortgage application may be less likely to be successful.
It is helpful to figure out how much you can afford for the deposit before you look for a loan estimate. Alternatively, a loan estimate may be able to show what deposit size you would need to put forward for a mortgage.
Your deposit amount will also link to the interest rate, which means that knowing the deposit helps you see a more accurate estimate of your payments. Having a high deposit can help with saving money in the long run.
Will this show me my monthly mortgage payment?
Your monthly payments may be different depending on the exact details of the loan you get, but a loan estimate can help you get a rough idea of what your monthly payments might be. The more accurate the information on house price and deposit, the more accurate your estimate will be.
Does this affect my credit history?
A mortgage application can cause ‘hard’ credit searches. This means that the lender will show that they looked up your credit and pre-approved you for a loan. The mortgage process can mean that you may not qualify for more loans if lenders think you are paying out too much money every month compared to your incoming money.
What else does the loan have to cover?
It is also important to remember that the loan amount has to include the fees involved with buying a house, such as any real estate agent fees or closing costs. You should also consider making a budget for removals, transporting furniture, and any furnishings you need – be sure to allocate some funds to this rather than put everything you have into the deposit.
The second piece of vital information you need to provide when looking for an initial loan approval is full details of your income. It is vital for the seller or lender to know about your financial situation as a buyer.
Income is the main factor that shows whether or not you will be able to afford your mortgage repayments. Most mortgage providers will ask you to show proof of income, such as recent bank statements and employment verification.
There are many different documents that can show you have the means to pay the lender for the loans you take out, and it is always worth gathering as many as you can.
Income with a spouse or partner
If you are getting am mortgage with your spouse or partner, their income will also be taken into consideration when approaching a lender.
Having information from both you and your partner helps give a complete view of your finances, which can help with finding al ender who will approve a mortgage.
What about self-employed income?
If you are self-employed, you may find it harder to apply for a mortgage, as income can be more volatile. Having proof of your income over the past few years can help. You may also need to show proof of any savings or other assets that will help reassure the lender that you can pay off your debt to them.
I’m due a raise – can I include this in my mortgage application process?
You should only ever approach a lender with an accurate account of your finances. They will require documents that prove your salary and other financial matters.
What about debts?
If you have too many current debts or other outgoings, you may find that you do not qualify for loans with some lenders. This can include car financing, other mortgages, child support, insurance premiums, and other types of debt. Your debt to income ratio will be considered when applying for any new loan.
What else do I need for the mortgage process?
Once you have all your personal details and your financial information ready, you should always check the website or other information from a lender so that you know what extra information or documents you may need to provide. Most lenders will be happy to answer any questions you have about the mortgage process.
If you need further help, read our guide for first time home buyers, with information to help borrowers and buyers, and help understanding the whole loan process.
Of course, once you have considered the financial matter of buying a house, you can start on the more exciting step – finding the perfect house for your life and retirement.