How to get approved for a mortgage

If you’re looking to get on the property ladder, you’ll need to know the ins and outs of home loans. But how do you get approved for a mortgage? In this guide, we cover the key aspects behind mortgage lenders, interest rates, approval techniques and more.

Six steps to get approved for a mortgage

1. Save for a deposit

You’ll need to set aside money each month for a deposit to demonstrate you’re responsible with managing your finances. Crucially, make sure it isn’t borrowed money. Banks and lenders won’t let you use a smaller loan to secure a larger one.

When it comes to deposits, the bigger the better. Using schemes like Lifetime ISAs and 95% mortgages can help you maximise the power of your deposit.

It's also worth increasing the size of your deposit.

Generally, the larger your deposit, the cheaper your mortgage rate will be.

2. Increase your chances with tidy finances

Tightening your belt is good advice at any time, but it’s vital in the 3-6 months before you apply for a mortgage. Banks will check your finances, so it’s important to get ahead and look your best on paper.

Having some existing loans on things like credit cards, phones or cars is fine - it helps show that you’re a capable borrower. But, banks become worried if your income is tied up in direct debits and loan payments.

You can improve your chances and increase your credit score by:

• Ensuring that you pay bills and debts on time.
• Reducing your outstanding debt as best you can.
• Closing old accounts.
• De-linking accounts with previous partners or old flatmates.
• Registering to vote.
• Making sure the addresses on your credit report are consistent. Many credit reports have been compromised by a lack of management.

Go one step further and find an expert estate agent who can help you find properties in up-and-coming neighbourhoods.

3. Shop around

See what mortgage deals the market has to offer. They are competing for your business so you’re likely to find a good deal if you spend a bit of time researching.

4. Confirm your affordability

The next step in getting approved for a mortgage is confirming your affordability. Lenders will ask questions about your finances and existing assets to your name. Some typical checks include:

• Reviewing the last three months of your income.
• Reviewing your expenditure and spending habits by analysing bank statements.
• Whether you have existing properties.
• Whether you have or want children (or other dependents).
• Where your deposit came from.

If you’re making a joint application (with a partner, business associate, or friend or family member), the lender will also ask about them.

You’ll need to decide for how long you’d like to borrow. 25 years is the traditional term length, but longer (and shorter) ones are available. Although your monthly payment may decrease, your total will go up with interest.

Once they’ve assessed your finances and approved your application, you’ll receive an ‘agreement in principle’ (AIP) document, specifying the limit you’re approved to borrow.

5. Give accurate answers

Inaccurate or inconsistent information can delay the process while plainly wrong information can land you in trouble. Follow the steps below to make sure your application is accurate:

• Have your employment records ready.
• Make sure you have details and dates for previous employment.
• Give your full name or make sure its consistent on everything.
• Declare your existing debt.
• Make sure to have your 3 years address ready with correct dates and postcodes.
• Make sure income figures are correct and include any bonuses if applicable.
• Make sure your proof of funds and deposit is accurate.
• Make sure your payslips align with the dates asked for.

6. Make a sensible offer on a property

Once you’ve found a place you’d like to live, put in an offer. If it’s accepted, your estate agent will work with the seller’s estate agent or solicitor, take care of the paperwork, and transfer the deed.

Remember, your mortgage application is tied to your ability to pay it back, so make sure your offer is sensible. If you make an offer that’s far higher than the valuation to win the seller over, your approval chances with the bank may decrease.

Your bank may also perform some final checks on the property before everything’s complete, such as conducting an independent evaluation or checking the home report once more.

If the bank finds that the property is overvalued, they may adjust your mortgage offer. In that case, you may need to adjust your deposit to make the gap.

Requirements for mortgage approval

To get approved for a mortgage you need the following 7 things:

Proof of income and funds

Your mortgage lender will need to know you have enough money coming in to make good on monthly mortgage repayments. They'll also need to determine where your funds are coming from, whether that's from bank or savings account statements. Evidence of your regular ingoings and outgoings will help the lender to make certain of your strengths as a borrower.

Proof of assets

As well as proof of income, proof of existing assets will help the lender to decide on your potential as a borrower. Assets, such as existing properties with mortgages, may hinder your application as you're already making regular payments for real estate, and may be unable to afford another.

A good credit rating

Your credit rating affects your ability to take out loans. Missed payments and overdue debt can contribute to a decline in the quality of your report.

A poor credit history suggests to lenders that you're not viable as a borrower, and that you will struggle to make good on future monthly payments. Lenders often employ credit reference agencies or underwriters to determine the quality of a would-be borrower's credit rating.

Remember: You can do a mortgage credit check with one of the primary three credit reference agencies - Equifax, Experian or CallCredit.

Proof of employment

Proof of secure employment will help alleviate any concerns the lender has that you could become a financial risk, as you are receiving a regular income and benefits. Frequent new jobs or periods of transition can be causes of concern for lenders, as they don't know whether you're capable of holding down a steady job.

Proof of identity

It goes without saying that lenders expect potential borrowers to be able to prove who they say they are. Borrowers should provide a passport or driving licence to prove their identity.

Valuation of property from the lender

At some point in the real mortgage application process, the lender will need to assess the market value of the property you want to purchase in order to verify your loan requirements. Mortgage valuations usually involve an appointed expert driving by the property to quickly ascertain its worth.

Deposit

Last but not least, a down payment (or deposit) is required for lenders to release the mortgage funds. This is usually 10 - 15% of your loan.

What can lower your chances of getting a mortgage approved?

Switching Jobs

Someone in long term employment looks like a more secure prospect to a lender than a borrower who has only recently started a job or changes work regularly. If you’re looking to move jobs, it might be worth focusing on securing a mortgage before making the transition.

Making any major purchases

A potential lender wants to see evidence of frugality. Hold off purchasing a car, major appliance or any expensive furniture until you secure a loan.

Taking any unpaid time off

Demonstrating that you are a reliable employee will help potential lenders see that you are a committed earner who can confidently make loan repayments.

Opening or increasing any liabilities

Increasing your debt by opening any new liabilities on new credit card accounts will make you appear even more untrustworthy to potential lenders.

Mortgage affordability

What mortgage can I get with my salary?

A rough guide to determine your mortgage affordability is multiplying your annual income by 4 or 4.5.

For example, on an average UK salary of around £26,000, you would be able to borrow between £104,000 and £117,000. If you and your partner are on the same wage as before, you would be able to borrow as much as £234,000.

Though this method gives an estimation of how much a bank will loan you, it ignores other factors. For example, banks may allow you to borrow more if you change your mortgage term length or interest rate.

How much mortgage can I afford?

How much mortgage you can afford depends on your current financial situation. Instead of paying rent, buying a house with a mortgage requires monthly repayments.

When it comes to outgoings however, repayments are just another sum of money leaving your bank account every month. With this logic, you want your repayments to roughly match the amount of rent you usually pay. Otherwise, you might end up unable to continue the standard of living you’re used to.

Mortgages with longer terms have lower monthly repayments because the mortgage is spread out over a longer period of time. For example, a couple that wants a £350,000 property could feasibly get a £315,000 mortgage with a £35,000 deposit. This type of loan (with an interest rate of 2% and a term of 25 years) would require monthly repayments of £1,335.14. Split between two, this would equal £667.57 each a month.

So, if you can afford £667.57 a month, and you’re looking to get a mortgage with a partner, you could afford a property worth £350,000.

Please note: Mortgage calculations change all the time and the above is not a reflection of current mortgage rates, but an example for educational purposes.

How to calculate how much mortgage you can borrow

There are four ingredients when calculating your mortgage affordability:

1. Mortgage sum
2. Mortgage length
3. Your monthly payment
4. The interest rate

The final figure is based on how much you can afford based on the details you provided previously.

A mortgage affordability calculator can also be a worthwhile option. MoneySavingExpert and Nationwide both have mortgage calculators that will let you play around with the numbers before you make an application.

It's always worth contacting a mortgage broker to help determine the right mortgage for you.

Summary: A lot to get through, but you can do it!

We’ve outlined the process you should follow to save for a deposit, get your finances in shape, and confirm your affordability with the bank before making a bid. Before you know it, you’ll be able to intelligently navigate the market to find a great mortgage deal and be on your way to a new home!

If you’re still in any doubt, don’t forget - you can check your mortgage potential for free with a mortgage calculator, or any of the three credit agencies mentioned above. Or if you want to check your available options, you could always splurge a little on a mortgage broker.