First Time Buyers
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First-Time Buyer’s Frequently Asked Questions
Listen below as Michael Webb talks all about mortgages for First Time Buyers.
In 30 minutes, you’ll know a lot more about getting your first mortgage sorted.
How is the mortgage process different for First Time Buyers?
It’s the first time they’re doing this process, so it can be quite daunting. The internet’s helped provide information to give you an understanding of the process. Ten or 15 years ago you would have walked into your bank and hoped someone would help you.
The actual process of getting a mortgage is largely the same for everyone. You speak initially to a mortgage broker, then have your income and affordability assessed and proven, with documents such as payslips and bank statements. If you’re self-employed you will need tax calculations and tax summary overviews. The affordability assessment will give you an idea of a price, so you can go and view properties.
That’s a bit different to someone who is moving house – they will potentially have an idea of affordability compared with an initial First Time Buyer, who will often start the process with little idea of what’s affordable.
Lenders don’t run an income multiple now, but many will publish a calculator online to give you an idea. They may give more weight or punitive results based on your income or whether you have credit card debts or loan payments etc. It’s all new to you so it’s a good idea to ask questions and find out where your affordability lies.
What is an Agreement in Principle?
An agreement in principle (AIP) or a decision in principle (DIP) are the same thing. It’s where you give certain information to a lender, they check your credit file and details and say that, in principle, if everything you’ve told us is correct, we will lend you X amount of money.
For an agreement in principle to be worth the paper it’s written on, the information entered into the lender’s system needs to be accurate. A mortgage broker will assess your payslips, bank statements, income and outgoings and accurately input the data to make sure it is correctly done and gets the optimum result for you.
How much can a First Time Buyer borrow?
This depends on many factors, including your income. Lenders no longer use income multiples. But generally, a higher income will mean you can borrow a higher figure. If you have a lower income, the less you will have on a monthly basis to put towards payments.
As an example of this, if you’re earning £50,000 you may get five times your income on a calculator. If you’re earning £20,000 you may only get four times your income because with a lower salary, the payment that comes out at the end is a much higher percentage of your net earnings.
Any loans, credit card debts etc will also be factored in. Different lenders can be more punitive on certain things. So Lender A may say you’ve got a car finance at £350 a month and that hits hard on how much they’ll lend you. Meanwhile Lender B may ignore it altogether because it’s due to end in a couple of years’ time, and will lend much more.
That’s another good reason to speak to a mortgage broker – your situation will be unique. A broker will be able to place you with the lender that will get the optimum outcome for what you’re looking to achieve.
What deposit is needed for a First Time Buyer?
Broadly speaking you would need a 5% deposit, subject to affordability and credit scores… all of the usual caveats. There are 95% mortgage deals out there now.
There are also a few ‘hacks’ in the mortgage market that can enable a First Time Buyer to buy a property without a deposit. Some lenders will offer a shared ownership mortgage, where they lend 100% of the share, which means you don’t need to put a deposit down. Those deals come in and out of the market depending on the lender’s appetite. If they are available, a First Time Buyer could buy a shared ownership property without putting any deposit down – they would just need to pay the fees for legals and stamp duty if applicable.
Another way to buy a property without a cash deposit is with support from a direct family member. A parent or a grandparent, for example, can gift you the equity in their property. Here’s an example: if their property is worth £200,000 they could sell it to you for £180,000. You can then use that £20,000 gift of equity as your deposit.
The same applies if you are a tenant buying from your landlord, if they are willing to do that because you’ve been a long-term tenant. We’re recording this in September 2022 and that is the current criteria – but all of these things are fluid and constantly changing.
If that’s something you are considering, speak to a mortgage broker who will let you know if the marketplace is currently offering these possibilities.
How do I know what my credit score is and how do I improve it?
There are three main credit agencies in the UK: Experian, Equifax and CallCredit. They individually score you out of a specific number. You can check your score by going direct to them, or use a service like Check My File which will show you all three credit files on one report.
However, when you’re looking at a mortgage, each individual bank or building site has their own internal credit scoring system. So even if you have a very good credit score, that doesn’t necessarily mean you will pass with a lender.
Let’s say your credit score with Experian is 900+ out of 1000. You could go to a lender and because you’ve got lots of loans that put your credit-to-income ratio quite high, that lender may internally score you lower.
To improve your credit score to appeal to a broader range of lenders, first and foremost you must pay your bills. Make sure you set up automatic minimum payments on your credit cards, loans, credit cards and utilities. Utilities are a big focus at the moment, so make sure they are paid by direct debit. They will impact your overall score and ability to get a mortgage if they are not paid. Mobile phone contracts are also on your credit file so don’t end a contract early or miss any payments.
Sometimes the only way to improve a credit score if there are ‘credit misdemeanours’ on your file is to put time between when they occurred and when you’re applying. Time heals all. Some misdemeanours will particularly affect your chances of a mortgage. A missed mortgage payment within the last 12 months can certainly make it more difficult. It’s not necessarily impossible, but will be harder – and obviously if there are consecutive missed payments that becomes even more challenging.
Other things you can do is make sure you’re paying down credit card debts, staying within your limit and not going over a large percentage of your usable credit. Also, ensure you’re on the electoral roll – that has a massive effect on your credit score. Other little hacks are to try and stay at the same address, which I appreciate can be difficult for some. But having multiple addresses within a three year period is going to affect your credit score.
If you have bad credit due to missed payments, bad debts, debt management plans, IVA, CCJs etc., getting those settled and putting time between them is the best way to improve your credit score. There’s not a lot else that you can do.
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What is a First Time Buyer ISA?
This term has been coined by the industry, but it’s never actually been called a First Time Buyer ISA. It was initially a Help to Buy ISA, which was aimed at First Time Buyers looking to save for a deposit. You could put some money into a tax free ISA and gain interest on it. Plus, for every £200 you put in, the government would add £50 which helped increase your savings.
The Help to Buy ISA has since been closed. It was replaced by a lifetime ISA which in essence works in the same way and has some additional benefits. You have to be 39 or younger to open a lifetime ISA and again the government will add additional money to your savings to help you raise the money for a deposit.
The additional feature with the lifetime ISA is that it’s not just for people looking to buy a house. If you already own a house and you’re under the age of 40 you can still open a lifetime ISA and pay into it. You can access the funds when you reach the age of 60 to help you in retirement. Either way, it’s a helpful way to save up money.
How does shared ownership work?
Shared ownership is a great way for people to get onto the property ladder, particularly in more expensive areas, or if they’ve got a lower deposit. It allows you to buy a share of a property, typically between 25% and 75%. In most cases you have the ability to buy up to 100% via a process called staircasing – buying additional shares of the property over time.
You will need a mortgage for the share you’re buying. If the property is valued at £200,000 and you buy 50% of it, you need a total of £100,000 including a 5% deposit of £5,000. Then you would pay rent to a housing association for the 50% that you don’t own. That rent is housing association rent, not open market rent. That cost would be index linked and reviewed annually, but will remain much lower than open market rental costs.
It’s a more affordable way to get onto the property market. You can buy more of the property as things progress and it’s ideal for First Time Buyers. The mortgage obviously has to be affordable, and the shared ownership or housing association company will also have their own affordability regulations. In our experience these can be more stringent than the banks’. Obviously they don’t want to have people overstretching themselves and being unable to pay the rental mortgage down the line, because that gets very messy.
What is a Joint Borrower Sole Proprietor (JBSP) mortgage?
Basically this means two people are borrowing the money and are responsible for paying it back, but only one person owns the property. These schemes are very popular for parents helping children to buy a home. They’ve replaced guarantor mortgages.
As an example, you could have a father and daughter buying a property using the father’s income plus the daughter’s income together. The joint income allows the daughter to buy a property that would previously be out of reach on her income.
JBSP is popular with people starting out on a set career path where within a five year period they could potentially take this mortgage on by themselves.
It’s important to point out that in our example, both father and daughter owe the money. If it’s not paid, the bank will chase both of them. But only the daughter owns the property – and, where this is clever, is where the additional stamp duty levy has come in. If the two just bought the property in joint names, it’s most likely to be a second home for the parent helping out. Not only would stamp duty be due, there would also be an additional 3% cost as a second property. That could become quite expensive, so the JBSP avoids that complication.
Typically the non-owning party will have to seek independent legal advice to prove they’re fully aware that they owe the money but don’t own the property. That’s an additional cost to bear in mind. But it’s a very good product. It’s not massively popular and not every bank offers it, but it does help numerous people get on the property ladder where they wouldn’t have been able to before.
What fees are involved in buying a home?
The first and most expensive cost is the deposit, at a minimum of 5%. But there are other things to consider too. Stamp duty regulations are constantly changing. It’s September 2022 and we’ve just had another threshold change for First Time Buyers.
The majority will not pay stamp duty, but in some parts of the country you may be buying above the new threshold. It’s in the early £400,000s now, up from £300,000. So be aware that there may be stamp duty due depending on the regulations and tax rules at the time of completion on your purchase.
Depending on the mortgage product you go with, there may be an arrangement fee. This can be added to the loan, but it’s good to recognise that if you have a £1,000 arrangement fee and you add it to the loan, you’re not just paying £1,000, you’re paying that plus thirty years’ worth of interest on it.
There may also be an application fee of a couple of hundred pounds, and there might be a mortgage valuation fee, otherwise known as a survey. Often a basic mortgage valuation is free on a First Time Buyer mortgage, but if not that could be a few hundred pounds to set aside.
That valuation can be upgraded to a home buyer survey, which may cost anywhere up to £600 depending on the purchase price and size of the property. You could also upgrade to a full building survey.
When the surveyor goes out for the bank for the basic mortgage valuation, they may recommend other reports that you would need to pay for, like damp and timber reports or structural engineers reports, depending on the condition of the property.
Another thing to look at is your legal fees. They will be dependent on the type of purchase – whether it’s a freehold purchase (a house, typically) or a leasehold purchase (an apartment). The costs for your legal fees will be based on how complex that transaction is and how many different parties need to be dealt with. A leasehold is more expensive because the solicitor needs to deal with more people.
Another part of your legal fees are searches including things like local government search, drainage water search. They’ll all be returned to the solicitor, checked over and then reported to yourself.
You also need to have buildings insurance as a condition of your mortgage. We’ll ask you to consider your risk areas: things like losing your income. Insurance can make sure you can stay in your property no matter what life throws at you. Life insurance, income protection and critical illness cover will ensure that you can pay that mortgage in any situation.
At your first appointment with us we will run through all of this, giving indications of fees based on your projected purchase price. I know of people who haven’t had that advice getting ready to exchange contracts and suddenly finding they are £2,000 short. The whole chain falls to pieces because they’re unable to complete – and they’ve lost all the money paid for searches and surveys. So it’s very important to get a close estimate of what your fees are going to be.
Do you have any final advice for First Time Buyers?
As a First Time Buyer you’re going to need some guidance through the process. It really helps to have someone on the end of the phone to answer your questions. They are never silly questions, but you might feel they are. So it’s great to have someone you trust to help and manage that process for you.
We’ve gone through it thousands of times so we know the hurdles you’ll face. We will manage situations before they occur and guide you through the maze to home ownership and make things much less stressful than otherwise they would be.
Your home may be repossessed if you do not keep up with your mortgage repayments.