What You Need to Know Before Applying for a Mortgage

For many people, buying a home is a life-long goal. A house is a fantastic investment opportunity, but for some people, it’s a chance to settle down and build a family and a life for themselves. Unfortunately, there’s a reason why this is a goal rather than something everyone just falls into as soon as they reach adulthood.

What you need to know before applying for a mortgage

Buying property is hard, even more so now than it was years ago. You have to build yourself up to be able to afford a home. Most people need to get a mortgage, and that’s the first major step to getting closer to their goal of buying a house.

Whether you’re buying a house for an investment opportunity or to have somewhere you can truly call your own, here are some things you should understand before you apply for a mortgage.

Should You Buy or Rent?

It’s best to start with the age-old question of whether to buy or rent. Both options have benefits and drawbacks, and what suits one person might not be the best option for someone else.

Renting a property is much less of a commitment than buying one, on both sides of the coin. It’s often easier to rent than buy, especially if you aren’t able to get a mortgage. You also aren’t responsible for the maintenance of the property, as it’s still owned by a landlord. If you don’t want to settle down in an area, renting can be an ideal choice.

However, while it can be handy not to have to maintain your property, this does mean that you have to rely on your landlord. You also have less control over how you decorate your property and, in some cases, whether you can have pets. 

Also, because you don’t own the home, you don’t get anything out of the rental payments. Rent can be more expensive than a mortgage, and you don’t get a house out of it. But if you buy, your property can make you more money in time, either by selling it or renting it out to other people.

What is a Mortgage?

First, it’s best to understand exactly what a mortgage is and why you will likely need it to buy a home. In short, a mortgage is a special kind of loan designed to help people buy property. Because the cash value of property is so high, it’s often easier to get a mortgage than to try to save enough money to buy it outright.

If possible, there are benefits to buying a property with cash or paying your mortgage off as quickly as possible. Mortgages are long-term loans. While they have a lower interest rate than credit card loans, they are still a tie to your mortgage provider for years to come. Many mortgages last for at least ten years.

The sooner you pay off the mortgage, the less you pay in total for your home. Also, because a mortgage is secured against the property, there is always the inherent risk of losing your home if you can’t keep up with repayments.

Different Types of Mortgages

There are a number of different types of mortgages, all of which can suit different buyers.

The most common type of mortgage is a fixed rate mortgage. You can take this out when buying a home or when remortgaging your property. Essentially, you only pay a fixed interest rate for a few years. Then you will have to remortgage or get moved onto a more expensive rate.

Tracker mortgages and discount mortgages can vary and have an introductory deal period where you can pay less for the first couple of years or until you remortgage. They are based on the standard variable rate, which can change a lot and is often more expensive than the other options.

You can also either get an interest-only mortgage, where you’re only expected to pay the interest each month and then have to pay off the whole mortgage at the end of the term, or a repayment mortgage. Repayment mortgages are more common and allow you to pay off parts of the loan as well as the interest.

Joint mortgages can allow you to increase how much you borrow, because they factor in both incomes. The downside is that both people become joint owners, which can be complicated in the future. Also, uneven credit scores can make a joint mortgage more risky.

How to Get a Mortgage

The first thing you need to do is to get mortgage quotes from a trusted expert. This lets you know how large a mortgage you are likely to be able to get. Mortgage providers won’t just give everyone the same amount of money. They have to factor in what you can afford and the likelihood of you paying back the loan.

There are different factors that determine whether you are likely to get a mortgage and the rates you are likely to pay. 

This means that you can secure better quotes by changing your circumstances.

Saving for a Deposit

While you might not be able to afford to buy a property outright, you can and should save up a portion of the value of your ideal property. The more you save, the better a position you will be in.

Most mortgage lenders require a deposit of some kind, and it’s recommended that you save at least 10% of the purchase price for a deposit. However, if you’re able to save more, you should be able to get better rates on your mortgage. You might also be able to get a larger mortgage, and you will definitely be able to pay it off more quickly.

However, with current house prices, this can mean saving thousands of dollars before you can even get a mortgage. 

While saving isn’t always easy, you can increase how much you save to achieve your goals. The most effective way to do this is by cutting down on nonessential spending as much as possible. Create a budget designed to help you save, ideally with a time limit.

If you’re trying to save quickly, this might mean making harsh decisions. Short-term budgeting can be harsher than a life-time budget. Write down your spendings over a series of months and figure out what luxuries you can go without. Get rid of subscriptions, especially ones you don’t use, and try to pay off any other debts as quickly as possible. Interest on debts is far higher than any interest you might be able to get on your savings.

Your Credit Score

Another way to improve your chances of getting a mortgage, as well as improving the mortgage deal you might get is to boost your credit score. There are several factors that determine your credit score, and some are more easily controllable than others.

Outstanding debts often reduce your credit score, especially if you have a habit of missing repayments. You need to prove that you borrow responsibly and that you pay off any loans regularly and ideally promptly. Interestingly, it’s best to have a history of taking loans and repaying them, rather than having no borrowing history at all.

Someone without a credit card, for example, hasn’t proven that they can borrow responsibly. So this can hurt their chances of getting a mortgage or another loan.

Credit score building cards are a great way to quickly improve your credit score. These cards are designed to allow you to borrow money in smaller amounts and then pay them off promptly.

What you need to know before applying for a mortgage

Your Career

Interestingly, your job can massively influence the type of mortgage you can get. Logically, it makes sense that a higher income and a higher wage will result in a better mortgage and the ability to borrow more. Mortgage providers consider what you can afford, and this means factoring in your income.

However, steadier jobs and a stable employment history can also have a significant impact. If you have a history of being unemployed for months or years at a time without good reason, it can make you seem less reliable.

The same can be said for self employed people. If you have only owned a business for a short time, your business and your income are seen as less stable. However, if you’ve been self employed for a few years and have records to prove that, you should still be able to get a good deal on your mortgage.

When You Have a Quote

Once you’re in a position to get a mortgage and have a quote, you should look for properties in your budget. Try not to stretch your mortgage too far as just because you can technically afford a certain amount, it might not be a smart financial decision.

It’s also good to bear in mind that circumstances can change, and this can mean that your quote can change. Make sure that you’re in a stable position before making a commitment on a property, and check that the property doesn’t come with hidden costs.

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