Credit Score Basics > How to apply for a mortgage

How to apply for a mortgage

Wollit Team6 minute read · Updated 1st July 2024

Applying for a mortgage in the UK can be a stressful process, especially if you’re a first-time buyer.

However, with the right preparation, you can secure a great mortgage deal for your needs. This guide will walk you through the steps involved in applying for a mortgage in the UK so you know what to expect.

What do I need to do before I apply?

Before applying for a mortgage, you first need to decide on your budget.

This involves calculating how much you can afford to borrow and how much you need to save for a deposit. A general rule of thumb is to aim for a 20% deposit, which can help you secure better mortgage deals. On top of this, consider other costs involved in buying a home, such as survey fees, stamp duty, and legal charges. These can amount to around 2% to 3% of the house price.

Second, assess your financial situation.

This includes checking your credit score, which can significantly impact the mortgage deals available to you and what kind of rates and LTV (loan-to-value) ratios you can get. A bad credit score can lead to higher interest rates or even mortgage rejection. Consider improving your credit score first.

One of the ways you can do this is by using a specialised credit-building app like Wollit.

Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies. This helps you build your credit history and directly influences your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders that you’re reliable and pay your bills on time, helping you make the most of your rent while you prepare to become a homeowner.

Finally, choose the right mortgage.

Consider factors such as the type of mortgage, interest rate, and repayment terms. A mortgage broker can help you decide this and find the best deal for your situation. They can also help you understand the types of mortgages available and the lenders that are most likely to accept your application.

What does the mortgage application process look like?

The first step in the mortgage application process is to find the right mortgage deal for you. This involves researching different lenders and mortgage products, considering factors such as interest rates, fees, and repayment terms. You can either work directly with a lender or use a mortgage broker to help you find the best deal.

Next, you’ll have to gather all your documents.

First, you’ll need a proof of identity. This can be:

A full, valid UK photocard driving licence. This is the most common accepted form of identification.
A passport.
Or a National Identity Card (EEA and Swiss Nationals only).

Next, you’ll need a proof of address:

Recent utility bills, such as gas, electricity, or water bills, dated within the last four months, are almost always accepted as proof of address.
Bank statements or credit card statements dated within the last four months can also be used.
Council Tax bills can be used as proof of address too, but they must be dated within the last four months.

You’ll also need proof of income:

If you’re an employee, you’ll usually need the latest payslips, showing the employer’s name, payment date, and net pay. For weekly or fortnightly payments, several months’ worth of payslips may be needed. You might also need the latest P60s. These are used to verify income and must include the employer’s name and net pay.
If you’re self-employed, you’ll need the last two years of tax returns. You can get this through a form called SA302, which your accountant can usually help you get.

Most banks will also ask for proof of expenses:

Bank statements: These are used to verify regular income and expenses, such as loan or credit card payments.
Utility bills: These can be used to verify regular expenses, such as utility bills.

Finally, you might also need additional documents:

If the deposit is a gift, a letter from the donor confirming the deposit is a non-refundable and unconditional gift is required.
For self-employed individuals, additional documents such as accountant’s certificates or invoices to customers may be needed.
If you’re not a British or Irish national, specific visa requirements and residency proofs are also required, to prove your right to live and work in the UK.

How can I get a mortgage agreement in principle?

Getting a mortgage agreement in principle (AIP) is the next step.

An AIP is a preliminary approval from a lender that shows how much they are willing to lend you. This document is also known as a Decision in Principle (DIP), Mortgage Promise, or Mortgage in Principle.

Keep in mind that an AIP is not a guarantee of a mortgage offer, but rather a preliminary assessment of your eligibility to borrow.

However, an AIP can be very useful:

An AIP can give confidence to estate agents and sellers that you are a serious buyer who can actually afford to purchase the property.
An AIP gives you an idea of how much you can borrow, which can help you search for properties within your budget.
If you have less-than-perfect credit, an AIP can also give you some reassurance about your borrowing prospects.

In other words, think of an AIP as a slightly more formal eligibility check for mortgages.

To get an AIP, you usually need to provide basic information about yourself, such as your name, date of birth, and address history. You will also need to provide details about your income and expenditure. This information is used to establish whether you are eligible to borrow from the lender and how much they are willing to lend you.

Also, getting an AIP usually involves a soft credit check, which does not leave a footprint on your credit file. However, if you decide to proceed with a full mortgage application, a hard credit check will be performed, which can leave a mark on your credit file and can temporarily lower your credit score.

When can I make a formal mortgage application?

You can proceed with a formal mortgage application once you have your AIP. This involves submitting your documents and undergoing a full credit check as well as other checks to verify your income, employment, and credit history.

The lender will also assess your affordability based on your net earnings and financial commitments.

They will review your employment, salary, expenses, outstanding credit commitments, and any debts or defaults. This helps them figure out whether you can keep up with your mortgage payments even if interest rates change.

As part of your mortgage application, your lender will also run a mortgage valuation to ensure the property you want to buy is worth the price you are paying. This helps them determine the loan-to-value (LTV) ratio and the amount they are willing to lend.

The Loan to Value (LTV) ratio for mortgages in the UK is a crucial factor that lenders consider when assessing mortgage applications. It is the ratio between the amount of money borrowed (the loan) and the purchase price of a property (the value).

The LTV is expressed as a percentage and is calculated by dividing the mortgage amount by the property value. For example, if you purchase a property for £200,000 and have a £20,000 deposit, your LTV ratio would be 90%.

LTV matters for two main reasons:

Lenders often offer lower interest rates for mortgages with lower LTV ratios. This is because a lower LTV means more equity in the property, reducing the lender's risk if the property values drop.
Lenders also use LTV to assess the risk associated with a mortgage. Since a lower LTV is viewed as lower risk, you might find yourself more likely to be approved for a mortgage if you put down a larger deposit (which lowers your LTV).

When can I purchase my new home?

Once your application is approved, you will receive a mortgage offer outlining the terms of your loan, including the interest rate, repayment terms, and any fees.

This is the final stage before you can complete the purchase of your home.

After you accept your mortgage offer, your solicitor will handle the legal aspects of the property purchase. They will manage the exchange of contracts and ensure the transfer of ownership. Once the mortgage money is released, you can collect the keys to your new home.

What influences the success of my mortgage application process?

The success of your mortgage application process in the UK is influenced by several factors:

The stability of your employment. Many mortgage lenders prefer full-time employed people over self-employed. For example, if you’re an employee, usually 3 to 6 months of payslips are sufficient. If you’re self-employed, you’ll need to be able to show at least two years of consistent income.
The size of your deposit. Having a substantial deposit can significantly improve your chances of securing a mortgage. The bigger the deposit, the lower the loan-to-value ratio, which can make lenders more likely to approve your application.
Your existing commitments. Lenders will assess your income and outgoings to determine whether you can afford the mortgage. They will look at your recent payslips or tax returns if you are self-employed. You need to be realistic about what you can afford to borrow and repay.
Your credit history. Lenders will check your credit history to make sure that you have a good payment history. Any previous defaults or missed payments can hurt your chances of getting a mortgage. Check your credit report before applying and make sure to dispute any errors with the credit reference agencies..
Your credit score. Your credit score plays a major role in determining your mortgage eligibility. A higher credit score increases the chances of being accepted and can also mean a lower interest rate, which can add up to tens or even hundreds of thousands of pounds saved over the course of a typical 30-year mortgage.

This is why you should focus on improving your credit score. The good news is that improving your credit score is possibly one of the most achievable things you can do to improve your chances of getting the mortgage you want on the best terms possible.

One of the ways you can do it is through downloading a specialised credit-building tool like Wollit.