How to get mortgage ready: Common mistakes to avoid

Common mortgage mistakes for first time buyers can involve having a low credit score, not thinking about the hidden costs that come with moving, and not getting an agreement in principle. Not sure what any of this means? No drama – in this article, we'll explain it all, and how to avoid these mistakes we’ve all made.

Understanding the mortgage application process

What is a mortgage?

A mortgage (or home loan) is money you borrow from a lender to help you buy a flat or house. With lower interest than a short-term loan you might take out for a pair of trainers, these loans are designed to be paid off over 25-40 years.

And when you finish paying it off, the house is yours.

Key steps in the mortgage process

Understand your money situation

Your first step should be to look at your finances. This means what you earn and how you spend it over a month. You’ll also want to check how much you have saved up for your deposit.

This information, which will be used when you speak to an adviser, gives you an example of how much a lender may allow you to borrow.

Get all your important paperwork together

Before you begin a mortgage application, you’ll need to get all your ducks in a row.

Except in this case, those ducks are proof of who you are and that you have the money to buy the house.

These documents include:

• Identification (Up-to-date passport and driving license)

• Proof of income (Your last three payslips)

• Proof of funds (Your last three months of bank statements)

• Proof of deposit (this may also be in the above)

Get an agreement in principle

When you start looking at a house, you need to be able to show that you can borrow enough to buy it. Because of this, an estate agent may ask you for an agreement in principle – sometimes known as a mortgage in principle (MiP) or decision in principle (DiP).

An AIP is an indication of how much you might be able to borrow, based on what you’ve told a lender or mortgage adviser. Some come directly from lenders, and others come through a mortgage adviser. Note the might. At this stage, nobody has checked your payslips, your bank statements or the property you want to buy. That happens at underwriting, and until it’s done, the answer can still change.

It’s still worth having though. It shows sellers and estate agents that you’ve done the basics and have an idea of what you can borrow, and it gives you a realistic idea of your budget before you fall for a house you can’t afford.

How to get a mortgage pre-approval

If you've already gathered the information outlined earlier in this guide, applying for an AIP is relatively simple. You can book a meeting with an adviser online or in-branch. Alternatively, most lenders now allow you to do it yourself.

Of course, as a first time buyer, you may want to speak to an independent broker.

What is a mortgage adviser or broker?

A mortgage adviser, also known as a mortgage broker, is a professional who can search the market for deals that are suited for where you're at right now.

This differs to an adviser who works at a bank or building society, who can only look for that bank’s options.

This means that (most of the time) a broker can give you more options, meaning you’re more likely to get a better deal.

Why use a Mortgage Broker?

How much money can I borrow?

How much you can borrow from the lender will depend on a few things. However, they’re generally based on your credit score, your income, and those things you spend your money on every month.

The general rule of thumb is that a bigger deposit means you spend less every month on a mortgage, and we all like that! A healthy credit rating helps too, though don’t panic, a spotty credit rating won’t necessarily stop you from borrowing.

Check out how much you can borrow

How long does home loan approval take? (i.e. when will you get your money?)

Approval times can vary – how long is a piece of string and all that – though a mortgage in principle (MiP) is usually decided the same day.

A mortgage offer, which is a formal contract, will take a little longer. The reason for this is that a lender will need to look at your finances closely before offering you the money.

Common mistakes to avoid

There are a few things you can do to make approval more likely, as well as some common pitfalls to avoid.

Not checking your credit score

When was the last time you checked your credit score? If the answer is never, or not recently, you may want to change that.

A credit score is one of the things lenders use to calculate whether you’ll be able to pay them back.

A good credit score gives you more (often cheaper) mortgage options.

On the flip side, a low credit score limits your options and can even impact your likelihood of approval, so you definitely want to keep it as high as possible.

Not getting an agreement in principle

You can apply for a mortgage without getting an AiP, but we wouldn’t recommend it.

This is because a AiP shows how much you may be able to borrow. Without this, you could end up viewing properties that you can’t afford.

Even if you can borrow the right amount of money, an estate agent may insist on seeing your AiP before accepting an offer.

In the best-case scenario, proceeding without pre-approval can slow the whole process down. In the worst case, it could derail the entire thing. So we recommend taking the time to do so.

Overestimating Your Budget

So, you’ve counted your savings and just managed to get enough for that sweet, sweet 5% deposit. What now?

Well, there are costs associated with buying that aren't always obvious at first. Things to think about include:

• Stamp duty (waived for first-time buyers buying properties in England and Northern Ireland for <£300k)

• Survey fees (£300-£1,500+ per HomeOwners Alliance)

• Legal fees (including conveyancing and searches)

• Moving costs

• Insurance and protection (more info here)

Understanding different mortgage types

You’d be forgiven for thinking that a mortgage is, well, just a mortgage. However, there are a few different types. Fear not though – we'll explain them all.

Types of mortgages

• Fixed rate mortgage – a straightforward, fixed monthly rate

• Tracker rate mortgage – monthly repayments are determined by the Bank of England base rate

Standard variable rate (SVR) mortgage – usually the product that lenders end up on if they don’t remortgage before a fixed/introductory rate ends. This rate can change monthly, much like the Tracker rate, but is often more expensive.

Offset mortgage – A mortgage that it linked to a current or savings account. Repayments are dictated by the available balance in the account each month. Depending on the product, this may reduce payments or help repay the mortgage sooner

How you pay for a mortgage

Repayment mortgage – the most popular type of mortgage in the UK, where homeowners pay off a certain amount of the loan each month

Interest-only mortgage – a type of mortgage where the homeowner pays off only the interest (a bit like treading water)

For more on all these work, check out our full article which covers why you might choose each one.

Getting started with the mortgage process

Following this whistlestop tour on how to get mortgage-ready, why not check out some of the helpful resources we have on Mab?

From the affordability calculator to monthly repayment calculator – which estimates your monthly outgoings – you can make plans for your next step on the journey to home ownership.