Applying for a mortgage is a daunting task for most first-time buyers. Financial jargon can be intimidating and hearing about other people being rejected can cause serious anxiety when attempting to secure a loan yourself. One element of the mortgage process that many people don’t understand in great detail is the factors that improve or worsen your chances of being approved for a mortgage loan. So, whether you’re scouting for one of the new homes being built or looking to buy an older property – what factors should you be aware of before you apply for a mortgage?
Credit Score
A term you may hear thrown about quite often is ‘credit score’. This is a significant factor in your hopes of being approved for a mortgage loan because it represents your trustworthiness and previous history when it comes to borrowing money. If you have a higher credit score, banks may be more confident in lending you money because you’re more likely to pay it back to them. Having a poor or non-existent credit history could hinder your chances of even being considered past the first stage. You can get an idea of your credit score through several online providers.
Outstanding Debt
Financial institutions ideally want people applying for a mortgage to have low levels of outstanding debt. Things like credit card debt and car loans are seen to eat away at your income which can potentially impact your ability to make mortgage payments. If you want to go into more technical depth, research how your debt-to-income ratio may impact your chances. Ideally, you should have low levels of debt before applying, whilst also managing those debts comfortably.
Employment Status and Income
Your employment status and income can be equally as important to banks and mortgage lenders. Those in stable employment and with a regular pay cheque are more likely to be seen as creditworthy borrowers. You may have heard about freelancers or self-employed workers struggling to get a deposit and this can be true in some cases. That’s because these kinds of employment increase the risk in the eyes of lenders, with income not being as fixed or stable. Your income will also determine how much you can realistically borrow too.
Deposit Amount
Another significant factor in your chances of being approved is the amount of down payment or deposit that you can offer. The larger the percentage of a property’s value that you are able to pay for upfront, the more confident banks will feel in lending the rest of the money. A 20% deposit or higher is typically seen as a strong offering and will improve your chances of being accepted. Many first-time buyers can offer much less upfront, nearer to 10% or 5% – some with help from help-to-buy schemes. The lower your deposit offering, the riskier the mortgage is considered and thus you may end up with a higher interest rate on the loan.
How Much You’re Asking For
Finally, the amount that you are asking for is important for lenders to manage risk. If you have a relatively low income and ask for more than you can realistically afford, you will be turned down almost instantly. However, if your income is well aligned with the property you are looking to buy, you are much more likely to be considered. You can benefit from many online tools that estimate how much you may be able to borrow based on your income alone.