Thinking of buying your first home but not sure where to start? Here’s a simple, step-by-step guide to the process – from sorting your finances, to viewing properties, to getting the keys to your new home.
Step 1: Work on getting your finances into shape
If you’re like most people, you’ll need a mortgage to buy your first home. To get one, you’ll have to show your lender that you can:
- Afford it
- Be trusted to meet your repayments on time each month
To begin with, there are two things you need to focus on in order to do this:
- Your credit score
- Your debt-to-income ratio
Why do you need to work on your credit score?
A mortgage is a lot of money. (Not surprising, we know.) So before a lender agrees to lend you that much, they’ll want to make sure you’ll actually be able to pay it back.
So before they make you a mortgage offer, a lender will look at your credit report, which shows how you’ve handled money in the past. That report is summed up in a single number: your credit score.
Building, improving and maintaining your credit score takes time. This means the sooner you start, the better. We’ve written a guide on how to improve your credit score, but in the meantime, here’s the short version:
- Sign up to MSE’s Credit Club, ClearScore and Credit Karma to see your Experian, Equifax and Callcredit credit reports for free. Check them regularly and get in touch if you spot a mistake, for example if your report says you’ve missed a bill you’ve actually paid.
- Always pay your bills in full and on time. It’s worth paying by direct debit whenever you can, to make sure you never forget a payment.
- Use your credit cards little and often and pay your balance in full each month. This helps you build a history of good borrowing behaviour.
- Avoid using more than 50% of your credit limit. If your credit card limit is £1,200, try not to have more than £600 on it at any one time.
- Avoid making lots of credit applications in a short space of time, especially in the run up to your mortgage application. Every credit application leaves a mark on your credit report, so having lots of them around the same time could give lenders the impression you’re struggling financially, even if you aren’t.
What is a debt-to-income ratio and why does it matter?
Your debt-to-income ratio shows how much of your income you use to pay off debt.
As part of your mortgage application, lenders carry out what’s called an ‘affordability assessment’. They’ll look at your income to see how much of it goes towards expenses – bills, credit card debt, your car loan, your student loan, and other outgoings, like groceries. This tells them how big of a mortgage repayment you could afford and still live comfortably.
The higher your debt-to-income ratio (so the more of your income you use to pay off expenses) the less you’ll be able to borrow. So, it’s important to get a handle on your debt before you apply. For example, you could:
- Try paying as big a chunk as you can off major debts, like car loans and credit card balances.
- Look at ways you can cut expenses. For example, you could try being more mindful with your spending.
- Avoid making large purchases on credit in the run up to your mortgage application.
Step 2: Find out how much you can borrow
Before you start viewing properties, find out how much you could borrow. It’s good to have a realistic amount in mind, so you don’t risk getting your heart set on a house only to find out you can’t afford it.
There are a few ways to get an idea of what you can borrow:
- Talk to a few different lenders. Your bank might be a good starting point if you just want to check how much you can borrow. But bear in mind they may not have the best deal when it’s time to get your actual mortgage. Many banks and brokers have affordability calculators you can use to get a quick idea of what you might afford, without leaving a mark on your credit report.
- Speak to a mortgage broker. A mortgage broker can dig through the deals for you. Just make sure you look for a ‘whole of market’ broker – as not all brokers have access to all the best deals on the market. If you’re not sure, see: What is a mortgage broker?. Also be aware that some mortgage brokers charge a fee for their advice. If they do, they should tell you this beforehand.
- Use a comparison website. Don’t fancy picking up the phone or walking into an office? Comparison sites like comparethemarket and uSwitch, or Habito’s mortgage comparison table can give you a good idea of what’s out there. You can also use a mortgage calculator to find out how much you could afford to borrow.
Once you find a deal you like, it’s worth getting a mortgage in principle or applying for an agreement in principle.
A mortgage in principle (MIP) is a basic check of how much you can afford to borrow. You can get one by speaking to a lender or a broker – you won’t be credit-checked for that.
By contrast, an approval in principle (AIP) is a statement from a lender confirming they’d be prepared to lend you a certain amount of money. To get one, you’ll usually have to send the lender some documents, like proof of your income. You’ll also have to go through a credit check. The upside is you’ll have a more accurate estimate of how much you can afford to borrow.
A mortgage in principle or approval in principle don’t guarantee you’ll get a mortgage. You’ll still have to go through a credit check and affordability assessment before you get your mortgage. That said, an MIP and AIP do show sellers you’re a serious buyer. That can be an advantage, especially if you’re bidding on a house that has a lot of interest.
In Scotland, you have to have an agreement in principle to make an offer.
Step 3: Save up for your deposit, and other expenses
You can borrow up to 95% of a house’s value. So, for example, if the house you want to buy is worth £150,000, you’ll have to pay at least £7,500 (5%) out of your own pocket.
Of course, if you can afford to put more towards your deposit, that’s usually better. A bigger deposit means you’ll need to borrow less, which could make your monthly mortgage payments lower. (This won’t be right for everyone of course, but is usually the case.)
Plus, banks like it when your mortgage is a smaller fraction compared to the property value, and start to offer you lower interest rates. That’s called your loan to value or LTV – you can read more about LTV here.
How to save for your deposit
Here are a few tips to help you save for your deposit:
- Try paying yourself first. The idea is to build up your savings by treating them as if they were a bill. Try paying a set amount of money into a separate bank account each month, ideally using a standing order.
- Consider opening a lifetime ISA. You can save up to £4,000 a year in a lifetime ISA and the government will top it up by £1,000 a year.
- If you’re finding it hard to save enough, you could take a look at a government scheme called Help to Buy, the government’s affordable home ownership schemes. If you qualify, the government will lend you up to 20% of the cost of a new build property, interest-free for five years.
How to save for the other costs of buying a home
Deposit aside, you’ll also want to save up for other costs. These include:
Your lender’s fees. Depending on the lender and your circumstances, you may have to pay one or more of the following:
- A non-refundable booking fee
- An arrangement fee. This covers the cost of setting up your mortgage
- The cost of a valuation survey, which lenders do to make sure the house is worth what you’re paying for it
- Transfer fees to cover the cost of transferring the money you’ve borrowed to your solicitor
- Mortgage exit fee, for maintaining and closing your mortgage
Home survey fees. You don’t have to do a home survey, but it may be well worth the money, especially if you’re buying an older property. Your lender will get a valuation survey for the property, but that only confirms on a basic level whether the house is worth what you’re paying for it. A home survey, on the other hand, will find out whether there are any problems with your home before you commit to a mortgage. In 2015, one in four sales fell through because the home survey uncovered serious issues.
Solicitor’s fees. You’ll need to hire a solicitor to handle the legal side of buying a property. This is called conveyancing. In Scotland, you can only make a formal offer on a property through a solicitor, so you’ll need to find one before you even start looking at houses.
Stamp duty. This is a tax you pay when you buy a property worth £125,000 or more. Right now, there’s a stamp duty cut until 31 March 2021 – you’ll pay no stamp duty for homes up to £500,000. See how that affects you. If you’re buying in Scotland, a different system called Land and Buildings Transaction Tax applies.
The difference between the house’s value and the purchase price. In competitive markets like London and Edinburgh, you might pay more than the house is actually worth to secure it. But the bank will only lend against its value, so you’ll need to pay the additional cost yourself. Let’s say your home is valued at £150,000, but you’re putting in an offer for £160,000. Your lender will only lend you 95% of £150,000. So, you’ll need to pay at least 5% of £150,000 (that’s your deposit), plus the £10,000 you offered over the value of the property.
Step 4: Make the right offer
Once you’ve got your finances in order and started saving for your deposit, it’s time to get serious about house-hunting.
You can look up properties and book viewings online using a website such as Rightmove or Zoopla. Or, you can speak to an estate agent.
Saw a house you like? It’s time to make an offer.
But how much should you offer?
How much to offer
Here are a few tips:
- Research the area on Rightmove or Zoopla. This will give you an idea of what houses in the area are selling for.
- Ask how long the house has been on the market. The seller may be keener if the house has been for sale for a while.
- If the bidding is ‘sealed’ it may be worth making an oddly-numbered offer. A sealed bid is when the seller asks buyers to anonymously submit their best offer in a sealed envelope by a set date, called a closing date. In this case, the seller will usually pick the highest offer, but you wouldn’t know what other prospective buyers have bid. So, bidding £151,001 instead of £150,000, for instance, could give you the edge.
What terms should you put in your offer?
You should also think about what kinds of terms it’s worth putting in your offer. In particular:
- The sale isn’t legally binding until you exchange contracts. So, it’s usually a good idea to ask the seller to take the property off the market if they accept your offer. This reduces your risk of ‘gazumping’, in which the seller backs out of the sale because they’ve received a better offer.
- Make your offer subject to a satisfactory home survey. If the survey uncovers serious issues, it’s worth trying to negotiate the price down or asking the seller to make repairs. Keep in mind that the seller can refuse. So, if the issues are very serious, for instance because there are structural problems, you may want to consider backing out of the sale.
- Make your offer subject to a satisfactory mortgage offer. This way, you won’t risk a situation where you’re contractually bound to buy the house but haven’t managed to get a mortgage.
- List what’s included in the purchase. Don’t assume you’re getting a fully-equipped kitchen because it was there when you viewed the house. The seller might take everything down before the sale is complete, so it’s best to put everything in writing.
Step 5: Apply for your mortgage
If your offer is accepted, it’s time to go ahead with your mortgage application. We’ve put together a comprehensive list of the documents lenders tend to ask for. Here’s a short version of that:
- Proof of identity, such as your passport or driving licence
- Proof of your current address, like a utility bill, Council Tax bill or bank statement
- Your last 3 payslips and proof of any other income. If you’re self-employed, you’ll need to provide at least 2 years’ worth of accounts, certified by an accountant
- Proof of your deposit, such as a bank statement. If someone is giving you the deposit as a gift, you’ll need a letter from that person confirming this and declaring they don’t expect it to be paid back
- Once your mortgage is approved and the sale is complete, your bank will also need proof that you have buildings insurance
The lender will make their credit checks and do an affordability assessment at this stage. They’ll also carry out a valuation survey on the property to make sure it’s worth what you’re paying for it. If everything goes well, you’ll receive formal notice, usually a letter in the mail, confirming your application has been approved.
It typically takes between three to six weeks for the lender to process your application. But it may take longer in some cases. For example, if the surveyors are unusually busy, it may take them longer to do the survey and complete their report.
Step 6: Conveyancing
While your lender is processing your mortgage application, your solicitor will be carrying out searches on your property. These include:
Local authority searches. These uncover issues such as:
- Building control. Sometimes, special rules and regulations may apply to your house. For example, if the house is located in a conservation area, you may need planning permission to make changes you wouldn’t usually need planning permission for, such as replacing your front door. This is because the council may want to protect certain unique characteristics of the buildings in that area
- Road schemes. For example, whether the council is planning any major roadworks close by
- Enforcement action. This might happen if someone has carried out building work without permission. The council would ask the owners to put things back as they were out of their own pocket
Drainage and water searches to confirm the house is connected to the sewers, what the water billing arrangements are and whether the house is at risk of flooding, damp or other issues
Environmental searches. These searches look at past use of the land the house is on and find out whether there are issues you should be aware of, such as contamination
In the meantime, it may be a good idea to book a home survey with a RICS-certified surveyor. They’ll look over the house and write a report outlining any issues you should be aware of.
Step 7: Exchange contracts and agree your completion date
Your mortgage has been approved, your solicitor is happy and the home survey gave the house a clean bill of health. Great! It’s time to swap signed copies of the contract of sale and get your keys.
But first, you have to pay for the house.
You don’t pay the seller directly – your solicitor arranges the payment. So you’ll need to transfer your deposit money into the solicitor’s client account. The solicitor will then forward this money to the seller (or, if the seller has to pay off their mortgage, to their bank). And, they’ll make sure your lender pays the rest of the purchase price.
Most banks won’t let you transfer more than £10,000 a day. So if your deposit is larger, you’ll have to arrange a CHAPS payment. CHAPS payments go through on the same day. But unlike a normal bank transfer, they cost around £25 to £30. Your solicitor will also speak to your lender to arrange the transfer of the money you’ve borrowed.
Once you exchange contracts, the sale becomes legally binding, which means neither you nor the seller can back out. You’ll now need to:
- Sign the deed of transfer, which confirms you’re willing to take over the property
- Pay your solicitor
- Agree a completion date. While the exchange of contracts is when you swap signed copies of the deed of sale, the completion date is the date when you actually get the keys to your new home. Typically, this happens within a week of exchanging contracts.
On completion day, you’ll officially be a homeowner.
And there you have it.