Money News Feature

The mortgage application process - from beginning to end

By Martin Fagan news@consumerchoices.co.uk

If you’re contemplating taking the plunge and buying your first home - or are planning to move from your current one - here’s the essential guide to how it all works

Every property owner has to go through the baptism of fire that is the mortgage application process. Without experiencing this, you’ll never become a homeowner. And, chances are, you’ll go through this process several times in your life. Although you may learn from any mistakes, it never gets any easier because, when it comes to getting your hands on the keys to a new front door, there aren’t really any short cuts.

Unless you’re paying in cash for a vacant property and don’t have a property to sell, a glitch-free housing transaction is a near impossible thing to accomplish. Rather like a snakes and ladders board, the journey to home ownership is a linear one (you start at the beginning and finish at the end), but with the possibility you’ll hit a problem that sees you wind up back at the beginning of the whole process.

Having a checklist of all the stages in the mortgage application process that lead to home ownership helps enormously, as it gives you an indication of how for into the process you’ve gone and how far you’ve got to go.

Finding a property takes time, patience and luck, so the 10-step process below doesn’t include that bit. Watching any TV property programme will show this decision is based on innumerable factors, from hardheaded financial ones to airy fairy emotional ones, so we’ll assume you’ve already made these.

1. Work out how much you can afford/need to borrow

Even before you go out house hunting, it’s essential to know how much you can afford to spend, as there’s no point harbouring champagne aspirations if you have a lemonade budget.

The maximum price you can afford to spend on a home will be the combination of the amount you can borrow from a mortgage lender and the amount you can raise yourself, either from savings or the Bank of Mum and Dad. Your earnings, the size of your deposit and your creditworthiness are all taken into account when you apply for a mortgage.

But, when buying a home, don’t forget all the added costs involved. These can vary from fees added to the mortgage by the lender - mortgage application fees, valuation fees - as well as conveyancing fees, Land Registry searches and the one that has the potential to dwarf all the others, stamp duty.

Although stamp duty land tax (SDLT) is payable on any property over £125,000, first-time buyers don’t pay SDLT on properties under £250,000 (if you are buying with someone else they must never have owned property before either). That’s the good news. The bad news is that stamp duty is charged at different rates, depending on the price of the property.

At the moment, you pay 1% on properties worth £125,000-£250,000, 3% on properties worth over £250,000 and up to £500,000, 4% on properties worth over £500,000 and up to £1 million, and 5% on properties over £1 million. Even worse news, unlike income tax which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property.

For example, a £250,000 property attracts 1% duty of £2,500, but a £251,000 property would attract 3% duty of £7,530 on the whole purchase price rather than no tax on the first £125,000, 1% on the next £125,000 up to £250,000 and then 3% on the £1,000 on top of that. In the tax year 2009/10, the government raked in £3.3bn in stamp duty, so there’s no chance it will ever be abolished.

Just as a car loan will pay for the vehicle but not the insurance, so too bear in mind that a lender won’t advance you any money to pay SDLT - you have to pay it out of your own pocket. So if you have to pay it, don’t forget to factor it in.

Adding all these numbers together will give you an indication on your total outlay for the property and if you can afford to borrow that much.

2. Comparing and finding a mortgage

The UK mortgage market is the most competitive in the world, and with that competitiveness comes a degree of confusion for the mortgage novice. Fixed or variable rate? Repayment or interest-only? Flexible or tracker? It all depends on which type best suits your circumstances and in which direction you think interest rates will be heading in the next few years.

To make sense of the seemingly endless variety of mortgages on the market and narrow them down to the one that best suits your financial circumstances, read our guide to the seven key types of mortgage.

3. Get yourself organised

No lender will agree to advance you a huge amount of money without first checking to see whether you have the means to pay it back and that the property you’re using as collateral for the loan is a worthy investment.

Although this is by no means an exhaustive list, a lender will want certainly to see the following and will tell you if they require additional information:

If you’re asked to send originals, ensure you do - don’t send in photocopies. For a joint mortgage, your lender will need documents from you and your partner or associate.

Don’t even think about falsifying these documents, either to bump up your salary or else pass yourself off as someone else. The prospective lender will conduct independent checks into your credit history, employment status and verify the information you’re supplying them. If they discoverer you’ve been economical with the truth, they’ll almost certainly turn down your application and could refer you to the authorities.

If your credit history is a bit chequered and you’ve missed payments and defaulted on loans or even a previous mortgage, all is not lost and you can still take steps to improve your credit rating and help a lender see you as a good risk to lend money to. Check out our guide for the top 10 ways to mend your credit rating.

4. Get an agreement in principle

This is a conditional offer made by a mortgage lender to verify it will ”in principle” give you the mortgage. This helps speed up the house buying process as it demonstrates to sellers you’re a serious buyer. However, it’s not a guarantee the lender will actually lend you the money, as this will still depend on a survey of the property and the outcome of credit checks. The offer in principle will be valid for a limited time, usually up to three months.

The agreement in principle is also music to the ears of estate agents, who will see you as a serious buyer. Many estate agents are reluctant to waste their own and their clients’ time by showing properties to people whom they suspect of not having the finances in place to buy them.

5. Appoint a solicitor or conveyancer

Underpinning the whole business of property purchase is the legal work that will identify you in law as the owner of the property you’re about to buy. You should never underestimate the amount of legal work involved in a house purchase, from liaising with the seller’s solicitors and conducting all the Land Registry searches to drawing up the contracts and exchanging them.

Also, the solicitor will be in contact with your lender as the money goes from the lender via the solicitor to the seller’s solicitors.

As the transfer of legal title of property from one person to another in English law is called conveyancing, some solicitors specialising in this area refer to themselves as conveyancers and do nothing but this kind of work. Whichever type of legal representation you engage, make sure they’ve completed all of the examinations and practical training provided by the Council of Licensed Conveyancers.

Like the mortgage market, the UK conveyancing market is competitive. Because a high number of solicitors and conveyancing companies offer a comparable service, pricing across the board tends to be similar. Some solicitors and conveyancers offer fixed-fee arrangements that are offered for specific types of conveyancing (such as a purchase or sale). For buying a house, the average fee is around £550; but whatever price you’re quoted, check to see what it includes and what may be added later.

It’s a good idea to engage the solicitor/conveyencer early on in the process, after you’ve got your agreement in principle from your lender, but before you put an offer in on a property. That way, when you do make an offer on a property, your appointed legal team can start the buying process immediately and give you a head start.

6. The full application

At this point, you may have put in an offer on a property and so this is the stage when the agreement in principle should coalesce into a concrete offer of finance. This means you’ll need to submit a full mortgage application for that specific property. If you filled out all the forms when you applied for your mortgage in principle and those details are still current and correct (especially if you did this online), this will save time as you hopefully won’t have to go through the whole form-filling rigmarole again.

Also, having already followed step three and got your personal documentation organised, your foresight will have sped up the process rather than slowing it down while you conduct a paper chase. And having taken sStep five, your legal team will be ready to move as soon as the lender confirms it will lend you the money.

7. References

While the full mortgage application is in process, this is the part of the process when the lender will need to get references to make sure all you have claimed on your application is actually true and accurate. This will include getting written references from your employer and bank or accountant as well as your current lender (if you have one) or landlord.

This is also the point when the lender will also do an in-depth credit check to make sure you’ve made all your repayments in the past, that you have no county court judgements (CCJs) to your name and that you’re a good risk to lend money to.

However, if the lender’s credit checks throw up any disparities with the information you’ve supplied about your finances, this is where they’ll refuse to advance the loan and you’ll slide down a snake back to square one of the mortgage application process.

8. Property survey and valuation

The final snake to avoid of the mortgage application process is the survey and valuation of the property you want to buy. A lender needs to know the property you’re borrowing against is worth the money it’s advancing,so the next stage is to get a survey and valuation done on the property. If you don’t have a surveyor, the solicitor will usually recommend one, as will a conveyancer.

It’s worth spending the money on a full survey, in which any structural problems with the property will be flagged up, rather than a “drive-by” valuation, where the surveyor merely visually inspects the part of the property visible from the street.

Therefore never confuse a survey with a valuation, as a survey gives you a run down of the structural condition and fabric of the property, while a valuation is just an estimate of what it’s worth. A full survey costs around £300 (and is generally added to the legal bills) but, as it also includes a valuation, it’s worth it. If you just pay the nominal fee for a drive-by valuation, your lender may still insist on a full survey which it will carry out independently, passing the charges onto you.

Moving quickly on the survey sends encouraging signs to the seller. Even at this stage, there’s a danger that the seller (sometimes called the vendor) could decide to either withdraw the property from the market or accept a higher offer than the one you’ve made. A speedy survey shows the seller your application is genuine and credible and, because at this stage the buying process is almost complete, it reduces the risk of the property going back on the market.

9. The mortgage offer

If the lender is happy with the survey and valuation and your financial circumstances check out and everything tallies, the lender will issue a mortgage offer letter. This is the official document which sets down the basis for the agreement between you and the mortgage provider and will be sent to both you and your solicitor. You will then need to sign it in the solicitor’s presence and the solicitor will return the signed offer letter to the mortgage company.

While the lender is processing the offer letter to prepare the money to advance on completion, your solicitor will draw up a mortgage contract which all applicants will need to sign. At this stage, you’ll normally be asked to place any deposit with your solicitor and commit to paying the balance (supplied by the lender) and then a date is agreed on which contracts are exchanged. If, after exchange of contracts, you fail to proceed to completion for any reason you may lose your deposit.

Before exchange of contracts, it’s advisable for you to commence buildings insurance cover; in fact, some solicitors won’t exchange until insurance is in place. This is because, after contracts have been exchanged, you’re jointly liable with the previous owners for any damage caused to the property after that date. Also, as the buyer once contracts are exchanged, you’re contractually obliged to buy the property even if the property burns down before you complete.

10. Exchange and completion

Exchange of contracts is an important milestone in purchasing a property. It’s at this stage you’re legally committed to proceed with the purchase of the property (and why you should have buildings insurance in place).

A date is also agreed for ”completion”. The completion date, a mutually convenient date agreed with the seller on exchange of contracts, is the date upon which the seller must give vacant possession and you can take up occupation. But before you get your hands on the keys, you first have to pay the balance of the purchase price, which is usually done on completion day.

On completion day, when the funds have been successfully transferred to the seller, the property is yours. You can then go to the estate agents, collect the keys and move in.

THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.