Question
Is there anything I can do financially – or even practically – to prepare myself for a mortgage application? I’m only asking because my friend recently told me that I should avoid making large purchases before placing an order. But I wasn’t sure what was meant by “large”?
For example, should I avoid going on vacation? I would appreciate your advice on what banks look for when they look at applicants’ finances. Thank you in advance.
Darren’s answer
Firstly, I am not advising you not to go on vacation, we all need to enjoy our vacations!
In terms of “large” purchases, this is more aimed at things that will impact your affordability such as credit agreements for loans, hire purchases, etc. This is because lenders complete an affordability assessment when determining how much you can borrow.
You should also keep in mind that such purchases may affect the amount of your deposit or additional funds required for your purchase, such as legal fees.
Lenders look at key areas such as:
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- Affordability – This means evaluating your income against monthly expenses to make sure what you can pay; Lenders will also test whether you can afford the payments if interest rates rise
- Employment and financial stability – Lenders will look for income stability through regular employment or steady self-employment income as evidence of your ability to make the monthly payments.
- Deposit – With standard mortgages, the size of the deposit directly affects eligibility and rates. Please note that in addition to your deposit amount, you still need to cover fees (legal costs etc.)
- Credit history – Lenders will evaluate your payment history, overdraft usage, County Court Judgments (CCJs), defaults or missed payments. Lenders usually need a good credit history; Bad marks like CCJs, defaults or missed payments can prevent approval altogether
Depending on when you plan to buy, I would advise you to get a Decision in Principle (DIP) which can also be known as an Agreement in Principle (AIP).
This crucial first step is an initial assessment from the lender of how willing they are to lend to you. It’s important to do this before you start your property search because it allows you to bid within your budget and avoid falling in love with a property that’s outside your range!
The lender reviews your financial situation, taking into account key areas such as:
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- income
- Expenses such as credit obligations
- Credit score (likely a soft check – i.e. not a perfect one – which won’t affect your score)
It’s important to note that this doesn’t guarantee you’ll get a mortgage, but it is a good indicator of your borrowing capacity and helps you understand your price range.
The first step is to talk to a broker who can research the market and ensure that the lender you are getting a DIP from is the best one for your circumstances. The broker will also ask you to provide some documents to support it, such as:
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- Proof of income (payroll and tax returns)
- Proof of address
- Recruitment details
- Details of any financial obligations
- They may request additional documents during this process
Once approved, the broker will give you a confirmation or certificate that you can show to the real estate agent when you make an offer.
Please note that DIP usually lasts between 60 to 90 days. If you do not find a home during this time, you may need to reapply or extend your application, especially if your financial situation changes.
In general, the application process can take place within one day, depending on your broker’s process and whether you have the required documents.
Contact a broker who can guide you through the process from start to finish, ensuring you get the best deal to suit your circumstances.
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