Thinking of buying a house this year?
Or have all the technical financial terms put you off?
There’s a lot more to buying a house in 2021 than finding a ‘For Sale’ sign and slapping down an offer. There’s so much to keep track of and a million little requirements bound to go over your head. In all likelihood though, you keep coming across a very familiar, but not quite understood term. Mortgages.
Mortgages are an important, make-or-break piece of the property buying puzzle, but they’re not impossible to comprehend. In this guide, we’ll explain everything you need to know about mortgages, from what they do to how to get your own.
What is a mortgage?
Let’s start at the top, what exactly is a mortgage?
In simple terms, a mortgage is a type of loan you can use to buy or refinance a home. Most typically, mortgages are used to help people buy a house who lack the cash upfront to purchase one.
Who Gets A Mortgage?
The vast majority of people who purchase a home do so with the help of a mortgage.
Mortgages are a necessity if you can’t afford the full cost of a home out of pocket. In some cases, opting for a mortgage makes financial sense, as investors sometimes mortgage properties to free up funds for other investments.
To qualify for a loan, a buyer is required to meet certain eligibility checks. A person requesting a mortgage will almost certainly need the following to be accepted:
- Stable, reliable income
- A debt-to-income ratio of no more than 50%
- A decent credit score
These factors will be covered in more detail at the end of the article.
What’s the difference between a mortgage and a standard loan?
A loan describes a financial transaction where one party receives a lump sum as long as they agree (and can prove they have the ability to) pay the money back.
Mortgages are just loans designed specifically for property financing.
Mortgages are “secured” loans. This means the borrower promises collateral to the lender in the event of payments stopping In the case of a mortgage, the collateral on offer is the home itself. Stop making payments and you risk losing possession of your home, a process known as foreclosure.
Do I need one?
The question of whether or not you need a loan is one only you and your financial advisors can answer.
Typically, mortgages are designed to help people who cannot afford the full payment towards buying a house, which encompasses the vast majority of property buyers around the world.
However, there are cases in which even those with the capital may want to opt for a mortgage, allowing them to delay the investment.
More than likely you will need a mortgage, but there are alternatives you can explore such as bad credit mortgages and self-employed mortgages, although they come with their own risks.
Tips for acquiring your first mortgage
Now that we have a clearer picture of what a mortgage is, let’s take a look at tips for acquiring one.
Keep an eye on your credit score
Before you even start thinking of applying for a mortgage, get a copy of your credit report. You can do so through credit reference agencies including Equifax.
This allows you to see the crucial data lenders will access when they review your application.
If the score isn’t looking all that good, don’t fear. A bad credit score isn’t a nail in the coffin of your property purchasing dreams. There are lots of simple ways you can boost yours, from signing yourself up to the electoral roll to closing down credit card accounts you no longer use. Most typically a bad credit score is being influenced by unpaid bills, so make sure you’ve wrapped up any loose ends from old properties.
Not all mortgages are created equal. With lenders having their own personal risk assessment processes and requirements, a better offer might just be around the corner.
This is why many buyers tend to use a mortgage broker to help them find the best deal. By comparing rates from providers like Breezeful, you can get a better picture of what’s out there and use the broker’s extensive local or national knowledge to bargain a better deal.
However, once you’ve started a mortgage application, resist the urge to chop and change or search for a cheaper deal. This can damage your relationship with lenders and add unnecessary delays to the process.
Stick with your job (for now)
Stable employment is one of the biggest factors in determining the kind of mortgage you’ll be applicable for, and whether you’ll get one at all!
The majority of lenders want to see applicants who have been with the same employers for a decent length of time. So, if you’re considering switching jobs, it’s a good idea to hang on until your mortgage is in place. There is no need to worry about a low-income salary because a family member or loved one can help you through a joint borrower sole proprietor (JBSP) mortgage.
If you have recently changed jobs, that’s not necessarily a problem, but a spotty job history with many short-term stays could put the majority of leading lenders off. Hold out on approaching lenders a little longer, just in case.
The bigger your initial deposit, the better
It pays to go in big.
If you can afford it or have the time to save, a big deposit can open you up to a range of better mortgage opportunities.
Lenders reserve their best rates for applicants with hefty pockets, so a strong initial deposit might just get you moving towards your dream house soon. You’ll also see the benefits of lower monthly payments with a better deal.
Mortgages continue to be one of the most important rugs to climb on the property ladder. But once you have one, you’re in a strong position to acquire the house of your dreams.
While they can seem overwhelming, hopeful this guide has provided some insight. Remember, there is so much you can do to make this an easier process, from working with local experts to buying alongside another person.