A guide to help first-time buyers prepare a successful mortgage application
We understand that applying for your first mortgage can be complicated and time-consuming, but it doesn’t need to be. Preparation is key to a successful mortgage application, so we have created a guide for first-time buyers to help make the right choices in preparing for the application. These simple steps can make all the difference.
Display Your Savings Prowess
The bank/lender is going to check 6 months worth of your bank statements all of them. Therefore, when applying for a mortgage for the first time, showing your ability to consistently save money and/or pay rent every month on time is essential.
You should have a designated savings account to separate your savings from your everyday spending. Setting up a monthly standing order into the savings account will help showcase your saving ability. The lender is looking for affordability; are you able to make repayments? If you can show how your plan on covering the proposed mortgage repayments, then you have one foot in the door.
Find out how much your new mortgage repayment is likely to be each month, then add on a couple of hundred euros on top to show you can cover your ‘stressed mortgage repayments’. This is the repayment figure the lenders use to assess your application. For example, if your repayments are likely to be €895 per month on a fixed interest rate of 3.15%, the lender adds on a couple of percent to ensure you would still be able to repay the monthly repayment in
case interest rates spike. This might mean ‘stressed’ repayments used for the calculation are €1,150. The lender needs to see 6 months’ worth of savings, rent, etc. of this amount. Lenders will also consider loan repayments that are due to finish soon and extra money left over in your account each month.
If you are currently renting, lenders recommend paying your rent out of your bank account every month. This payment being on time each month is important too, because paying on-time and in full every month demonstrates to any potential mortgage lender that you have
good financial behaviour and will repay the mortgage. If paid in cash, a copy of your lease agreement will be required, and the lender will look to your statements then to see when the cash is withdrawn.
Your Employment Status
You can only apply for a mortgage when you are in full-time employment for a minimum of one year. If you are with your current employer less than one year, details of your previous employment may also be requested. You cannot apply for a mortgage while on probation at a job, as your job is not considered to be full-time and permanent until the probationary period is over.
Your job status demonstrates your ability to maintain a stable and long-term job during mortgage payments. Considering that most first-time homebuyers’ mortgage payments will be spread out over 25 to 35 years, the lender wants to see as much security in the application as possible to minimise their risk of you defaulting on repayments. If it is the case that you have unique circumstances in which they have not worked full-time for an entire year, your application can be still be evaluated but nothing is guaranteed.
If self-employed or working on contract, the lender will want to see 3 years of your end of year books. What they look for, is of course affordability, but also, is your business doing better each year, is it consistent, or is it in decline?
Account Management & Spending Habit
It’s essential to be conscious of your spending habits for the 6 months before applying for a mortgage. As previously stated, set a monthly budget, including regular savings, and strictly adhere to it. Anything akin to gambling will raise a red flag.
Check your direct debit list to make sure that everything you pay for is useful to you, then cut out any expenses that aren’t necessary. Creating a comprehensive budget outlining the ins and outs of how money enters and exits your bank account will eliminate any unnecessary overspending. If you are dipping in and out of your savings accounts prior to an application, it is going to go against you.
Affordability
The biggest calculation the lenders use is your overall affordability. Lenders use ‘benchmark’ spending in their calculations, meaning if you are a 2 parent and 3 children household they are using one predetermined figure for your normal monthly spend on things like groceries, utilities etc. Take that from your monthly take-home pay and you have your Net Disposable Income. The lender then considers what your loan repayments and child care costs are each
month. These are considered to be necessary expenses that will still be in place if you get the mortgage. So, if you take those monthly costs away from your Net Disposable Income, can you still afford the new monthly mortgage repayments?
This calculation is very clinical with lenders and usually is the primary reason for failed applications. Knowing your numbers in advance is going to help you prepare best.
Secure Pre-Mortgage Approval amount.
Before looking for a new home, getting pre-mortgage approval, also known as Approval in Principle (AIP), will help you figure out how much the lenders are willing to lend, and how much you are able to afford. It provides your exact purchase amount and shows the real estate agent the amount you have available to spend on your new home. You can borrow 3.5 times your salary (soon to be 4 times in Jan 2023), but that is not necessarily how much you will be authorised for.
The typical AIP lasts six months, so getting the approval then shopping for property is generally a good move.
Proactive search for property Online & Offline.
We suggest contacting your estate agent after receiving your mortgage approval to take advantage of your recent approval and the current housing market. Purchases generally take a few months to close so there won’t be much time to waste. AIPs can be extended, when required, but documents in the application will need updating.
We recommend you rely on more than just online property searches, although it can be instructive and provide insight into pricing and the market. Real estate agents have a lot to offer when it comes to first-time homebuyers. First and foremost, their pricing expertise will
help you set expectations and locate the ideal first home within your budget. While you can compare house prices with some online research, real estate agents have years of experience determining when a property is over-priced or under-priced.
A real estate agent will ensure you save time looking at homes that don’t meet your needs. Additionally, an estate agent will frequently point out problems with a property you might need to be aware of. The possibility of noise pollution, dampness, foundation flaws,
inadequate ventilation, and drainage are examples of such issues. Finally, estate agents can simplify buying a new home by taking care of the paperwork, negotiating skills, local knowledge, and meticulous record keeping, among other benefits.
Credit Report
Before approving a first-time buyer’s mortgage value, a mortgage lender will conduct a credit check to assess the applicant’s ability to repay. It involves looking at previous loans to see if there are any missed direct debits or arrears on accounts. You will have a good credit rating if you have previously taken out loans and successfully repaid them in full and on time.
Conversely, your credit rating may be low if you have had trouble repaying a loan in full and on time. This raises a flag to a mortgage lender as they might think the same will happen with
their loan. While this does not stop you from receiving mortgage approval, it may impact the loan value.
Before applying for a mortgage, we recommend checking your credit rating yourself. You can check your credit rating by visiting the Irish Credit Bureau (ICB) website https://www.centralcreditregister.ie/ and following the steps. You will receive your ICB report detailing your credit rating with in a couple of weeks.
Talk to us for Mortgage Advice
When applying for your first mortgage, it is always a good idea to get impartial advice from a mortgage broker. Rethink Money will offer you helpful guidance during the initial buying process. We will inform you about the various mortgage lenders and repayment options available, as well as which one is most suitable for you and your requirements for the application. In addition, we will offer you other relevant guidance and information on the best house insurance, mortgage protection options which need to be in place before the mortgage is drawn down.
We hope our guide for first-time buyers is useful to you. If you need any assistance please get in touch with us at info@rethinkmoney.ie or call us on +353-74-911-6777.
