Failing to Prepare is Preparing to Fail

As we start another year, it’s common for people to review their finances. It’s also common for people to start thinking about mortgage requirements for the year.

Whether your plans involve moving, improving, saving or investing with a mortgage, it’s important to plan ahead.

Here are some common issues that people should consider when mortgage planning –

  1. Should I repay my existing debt?

The simple answer is usually ‘Yes, if you can afford it,’ but it’s not always that simple. You may have paid fees for a 0% credit card or may not wish to take an unsecured arrangement and secure it against your property.

The key point here is making sure that debt is manageable in conjunction with a mortgage. While debt may affect affordability, you may not have to repay any (or some) of your debt in order to get the mortgage you need. It’s important to seek independent advice before taking any action. Good advice will help you organise your thoughts, make informed choices and confirm what (if anything) needs to be repaid in order to get the mortgage you need.

  • Do I need to improve my credit score?

Credit scores can be easily obtained from credit reference agencies (i.e. Experian, Call Credit, Equifax etc). It’s important to note that while these are useful tools to help you manage your finances, they are not a definite indication as to whether you’ll get a mortgage or not.

In the same way that each credit reference agency has their own scoring system, so does each mortgage lender. Some lenders don’t’ even credit score at all. Use credit reference agencies as a guide and combining the information with independent advice will give you a true indication of your mortgage borrowing capacity.

  • How Long do I need to be employed / self employed for?

It’s a common misconception that you need to be employed for 3 months before applying for a mortgage. While this may be true for some lenders, some will accept day 1 employment and some will even consider future contracts. However, if you have recently changed employment or are thinking about it, you should consider other important factors before considering a mortgage i.e. security, compatibility, income and expenditure etc. If you are happy that your new employment is for the long term, then speak to an independent adviser who will give you your options.

For self-employed clients (including ltd co directors with over a 20% shareholding), the minimum trading period is 1 year. While many prefer 2 years and you can have the pick of the bunch with 3 years, there are some options available with 1 year trading. Speaking to a specialist in this area is key to ensuring that you get the right mortgage, but also in the most tax efficient way.

  • What do lenders look for on bank statements?

The short answer is good conduct. However, bank statements can tell a lender much more in terms of how a person manages their income and expenditure.

Since the Mortgage Market Review, there have been some horror stories about people being penalised for things like gym membership costs. While some lenders may look at every cost as an outgoing (and why not), as long as you are managing your finances properly and have more income than expenditure, you shouldn’t have anything to worry about.

Bank statements can be used to paint a picture about the type of borrower you potentially are. If you take your last 3 months bank statements and go through them with an independent adviser, they can give you some guidance on what to look for.

  • What additional pay can be taken into account?

There are many different type of income that can be considered for a mortgage. These can be income from employment such as bonuses, overtime, shift allowance or allowances. They can also be benefit income such as child tax credit, working family tax credit, disability living allowance or child benefit.

The simple answer is that there is no simple answer. Each lender has their own criteria. Some accept some incomes, while others accept others. While this may seem as clear as mud, the good news is that there are many options available so speaking with an independent adviser will help clarify who is the best lender based on your individual circumstances.

  • What deductions do lenders make?

There are many straight forward deductions such as loans, credit cards and HP agreement payments. These will be deducted by all as standard.

There are however some variables. Pension contributions, child care costs, school fees, share save schemes and other deductions showing on payslips can affect affordability. What and how much depends on the lender so speaking to an independent adviser will help clarify who is the best lender based on your individual circumstances.

In summary, to prepare for a mortgage you need some basic information –

  • Credit Search (Full report, not just a score)
  • 1 – 3 payslips (employed) / 1-3 years Accounts or SA302s (self employed)
  • 3 months bank statements
  • Fully completed fact find

Remember, a potential lender doesn’t know you personally. They use tools like the list above to build a profile and make an underwriting decision based on risk.

If you were going to lend tens (or hundreds) of thousands of pounds to somebody without speaking to them and only using the tools above, what would you look for?

These tools paint a picture. What do yours say about you and what type of borrower you potentially are? If you combine this approach with independent advice, your chances of getting the right mortgage will be greatly increased.