First-Time Buyer Mortgage Application Process: Essential Reading

Couple sitting on sofa with their pet dog in their new house

If you’re considering applying for a mortgage make sure you take the time to research and prepare, because no one wants their application to be rejected!

This guide covers everything you need to know about the mortgage application process. After reading you’ll know how the process works, what you need to prepare, how to maximise your chances of acceptance, and what to do if you are rejected.

Here’s what you’ll find in the guide:

  • A breakdown of how the mortgage application process works.
  • What everyone needs to prepare.
  • What you need to prepare if you're employed.
  • What you need to prepare if you're self-employed.
  • How credit rating impacts mortgage applications.
  • How to find your credit rating.
  • How to improve your credit rating.
  • What is in a credit report.
  • What to do if your application is rejected.
  • A checklist showing common reasons a mortgage application may be declined.

How the mortgage application process works

Applying for a mortgage is inherently complicated. This section of the guide outlines the steps involved in the mortgage application process; it is meant for readers who have an idea of what they can afford and are looking for the best mortgage deal available.

With a rough property value in mind and an idea of what percentage deposit you’ll be able to pay, your first step is to look at mortgage products available on the market.

This involves speaking directly with lenders (i.e, banks, building societies, etc.) or with a mortgage advisor, and shortlisting a few deals that fit your criteria.

The next step is to receive ‘key messages about the mortgage service’ from your lender or advisor.

This includes the name of the lender(s) whose deals you will look at, the cost of their service (including fees or commission if you're using an advisor) and whether details provided are information-only or count as advice. Mortgage advisors are legally required to give advice.

Then you should decide whether or not to accept advice. If you do not accept advice, the mortgage is execution-only. This may reduce your chances of acceptance if you don’t fully understand what you’re applying for. It may also prevent you from being able to claim compensation if it turns out the mortgage was mis-sold.

You can now identify mortgage products suitable for your circumstances and request detailed information on each one.

This information will usually come in the form of a Key Facts Illustration (KFI), and will outline repayments, fees, the overall cost, interest and term, any changes in interest, whether or not you can underpay, penalties, and various other aspects of each mortgage deal.

Once you find a deal you like the look of, you can choose to state your agreement in principle (AIP).

This is a non-binding agreement between lender and borrower that the specified mortgage deal could be made.

Your eligibility to borrow will then be assessed. The potential lender will look at your financial circumstances including credit rating, proof of income, outstanding debt and more.

The value of the property will also be assessed. The lender needs to be sure that the property provides suitable collateral for them to recoup their losses if you are unable to pay. A valuation will be carried out to determine this. This is also the time when you can request a survey, to strengthen your understanding of the condition and value of the property.

When the lender has decided you are suitable, you will receive a mortgage offer.

This is a document officially offering you the mortgage deal outlined in the KFI. At this stage, you should check the offer against the KFI and raise any inaccuracies or discrepancies with the lender. If all goes well, the offer is a legally binding statement that you will receive the mortgage.

On completion, your solicitor will request the money from the lender and transfer it to the seller’s solicitor.

At this point the title deed is transferred, revoking the seller’s bank’s claim to the property. You now own the property and can begin paying back the mortgage on the agreed terms.

Everything you need to know when applying for a mortgage

There are some things everyone will need to prepare. Others things will vary on whether you work for an employer, or you are self-employed. This section of the guide has you covered for both.

Remember, lenders want to be sure their risk is minimised: preparation is the key!

Things everyone needs to prepare

Lenders will presume the worst from any gaps in your application, so make sure they’re filled in advance. Fewer doubts mean a higher likelihood of an approved application.

Everybody needs to do these things:

  • Register to vote: There is close to zero percent chance that your mortgage application will be accepted if you are not on the electoral register.
  • Provide utility bills: These prove your current address, and demonstrate your ability to repay debts.
  • Provide proof of any benefits received: This strengthens a lender’s understanding of your financial situation.

What to prepare if you are employed

Being employed often contributes favourably to your mortgage application, but you must be prepared to demonstrate your employment is secure, ongoing, and pays enough that you can make mortgage repayments.

With each item below, the idea is to give as clear an explanation of your employment status, your earnings, and your position within the company as possible.

  • A P60 form from your employer. This shows your income and annual tax payments.
  • Three months of payslips. Another level of verification of your pay, and a breakdown of tax and other deductions.
  • Three months of bank statements, so they can verify your income matches your payslips.
  • An SA302 tax return form if you have sources of earnings beyond your employment, for a full breakdown of your taxes.
  • Written confirmation of your bonuses or commission, if you work in a job using commission structure. Because your income will vary from month to month, lenders need to understand the likely average, and the likely upper and lower bounds.
  • Written explanations of any recent changes in contract or role within your company. This is helpful in clarifying ambiguity between paychecks if your pay level has changed.
  • Written confirmation of your salary from your employer, especially if you are in a new job or if you recently received a pay rise. This is to demonstrate permanence of the new figure on your paycheck.

Some questions to be ready to answer if you're trying to get a mortgage with a new job:

  • How much do you earn? Don't round up or down here, give the exact number.
  • How long have you been in your job? Shorter tenures mark you as a higher risk borrower, as you are easier to dismiss if you are in your probation period, and more likely to be made redundant than more established employees.
  • Is your employment permanent? A fixed-term contract has the same issues as a probation period, in that there is no guarantee you will be earning at the end of the term. Lenders consider this a risk to your ability to repay.
  • Are you on probation? If so, when does your probation period end? Permanent employees have greater job security than those on probation, bringing the implication that their earnings and ability to make mortgage repayments are more secure.

What to prepare if you are self-employed

You can be considered self-employed if you're a freelancer or contractor, involved in a partnership, or own a limited company. You deserve the same opportunities to get on the housing ladder as your office-bound peers.

What defines self-employed?

The government says “a person is self-employed if they run their business for themselves and take responsibility for its success or failure”. If you’re a freelancer or contractor, involved in a partnership, or own a limited company, you can be considered self-employed.

Lenders may use a definition of someone with a stake of 25% or more of the ownership of a business

What do you need to apply?

You will need 2+ years of accounts for most applications, along with a track record of regular work (ideally over 3+ years).

Which figures will a lender look at?

If you are a sole trader or in a partnership, lenders will look at your share of profits.

In both cases, lending calculations are based on average profits. if your income has been increasing, average earnings over 2-3 years will be used; if it’s decreasing, the latest and lowest figure will be used.

For contractors, lenders will take your day rate and multiply it by the number of working days in a year for an indicative salary figure.

For owners of limited companies, lenders will look at salary and dividends. Retained profits (money invested into the business) may be considered by some lenders, but should not be relied on.

How can you prove income if you are self-employed?

By providing accurate and detailed accounts, preferably compiled by a chartered accountant. Most lenders require a minimum of 2 years. Some will accept 1 year, but this will limit your options.

An SA302 form, available from HMRC, can provide evidence of earning for up to 4 years.

Be honest about gaps in your earning: don’t attempt to hide them. Be ready to explain them and to demonstrate you’ve prepared for and controlled against gaps in the future.

What works in my favour during the application?

Your application will be viewed more favourably if you left employment to work as a contractor in the same industry.

Evidence of future work, preferably regular contracts, will work in your favour.

Good average income and a good deposit will give you a stronger loan-to-value ratio, meaning lenders will be taking less of a risk as they are lending to someone with a more demonstrable capability to repay.

What works against me during the mortgage application?

It’s unlikely you’ll be successful applying for a mortgage before filing your first tax return, as you have no proof of income.

A low income and low deposit will give you a less favourable loan-to-value ratio.

Creative accounting techniques to minimise profits for tax purposes will impact negatively on your mortgage application, which rely on you demonstrating capacity to generate profit.

What about credit rating?

Credit rating can have a big impact on mortgage applications, and it’s something we get asked about quite often.

This section explores the relationship between the two, providing information on what credit score is required when applying for a mortgage, as well as how to improve your score.

What credit score do I need to get a mortgage?

Many people don’t know their credit score and fewer still understand the impact it can have on a mortgage application.

There is no fixed score that guarantees acceptance. This is because different lenders will look at different credit reports and each will have their own lending criteria. Because of this, there is no "one-size-fits-all" advice that can be given.

As a rule of thumb, the higher your credit score, the better your chances of being accepted for a mortgage. While no specific advice can be given, there are a few red flags that could have a negative impact: these are explored below.

What is credit rating?

Credit rating is a numerical representation of your financial behaviour, based on your history of spending, borrowing and repaying. It takes into account credit cards, overdrafts, bills and more.

It provides an important component of your Data Self, which lenders will look at when deciding whether you are eligible to borrow.

A good credit rating demonstrates your ability to manage money well, which lenders take as an indication that you will be able to repay your mortgage in full and on time, thereby reducing their risk.

How is your credit rating checked?

Each lender will have their own method for checking an applicant’s credit rating, but most will use one of the UK’s three main credit reference agencies: Experian, Equifax and Callcredit.

The lender will request a credit report from one of these agencies and use their findings when making their decision.

What is in a credit report?

The reports from each of the three credit reference agencies will be different:

  • Experian rate you out of 999, with a score above 700 generally considered good, and above 800 excellent
  • Equifax rate you out of 700, with a score above 475 considered good
  • Callcredit rate you out of 5, with higher scores being better

As another rule of thumb, a credit rating at a minimum of good will be required for most mortgages.

How can I improve my credit rating?

If you know or suspect that your credit rating may not be up to scratch, you can take steps to improve it (Request a report from one of the above reference agencies if you’re unsure about your credit rating score).

Steps which may improve your credit rating:

  • Avoid taking out credit within 6 months of applying for a mortgage
  • Check you do not have any neglected credit cards
  • Make debt repayments in full and on time: try to overpay if possible
  • Make a budget and stick to it: try to end each month with a positive bank balance
  • Stay within your overdraft and credit limits

Lenders will consider signs of financial stress as red flags: this could include things like only making minimum debt repayments, taking on extra debt, or relying on your overdraft.

In short, a good credit score will boost your chances of being accepted for a mortgage. While there is no one-size-fits-all advice that can be given, avoiding red flags and taking steps to be sensible with money is a good start.

What happens if your mortgage application is rejected?

There’s no sugar-coating the fact that some mortgage applications are rejected. This is frustrating, and it can be very demotivating.

If this happens, dust yourself off and try again. There are plenty of ways to strengthen your application, which we outline below.

The most important thing is to not just re-submit the same application! Take time to find out why it was rejected, make the relevant amendments, then try again.

Rejected because of your finances

You must demonstrate your capability to make mortgage repayments both in terms of available finance, and effective management of your finances.

Be prepared to give 12 months of bank statements, gift letters for any financial help received, and proof of savings deposits.

In the run-up to your application, avoid borrowing elsewhere. Attempt to pay off as much debt as possible with regular, manageable payments. Lenders look at monthly repayments rather than outstanding debt; efforts to reduce these are recommended.

Outstanding debt may suggest that you don’t have the means to make mortgage repayments.

Your application may be declined if:

  • A small deposit meant your loan to value (LTV) ratio was unfavourable
  • You regularly entered or stayed in your overdraft
  • You have a large amount of unpaid credit card debt
  • You have outstanding loans
  • You have old unused bank accounts
  • You have blemishes on your credit record that need addressing
  • You are financially linked with someone who is negatively impacting your credit
  • You missed bill repayments in the time leading up to the application
  • You did not provide enough evidence of earnings
  • Your income was deemed too low or irregular
  • You gave estimate income figures on your application
  • Your income fluctuates, rather than showing stability or a gradual upward trend
  • You are self-employed and have not yet filed a tax return, or have less than 3 years of demonstrable income
  • You are self-employed and used creative accounting methods to lower your recorded income for tax purposes, thereby reducing your income figure

Rejected because of your employment status

Lenders need to understand your work situation, as this is the main source of the money that will be used to make repayments. Be willing to show 6 months of payslips (or 3 years of earnings if you are self employed), and proof of bonuses and other income.

You are trying to demonstrate that you earn as much as possible.

Your application may be declined if:

  • You did not provide enough evidence of earnings
  • Your income was deemed too low or irregular
  • You gave estimate income figures on your application
  • Your income fluctuates, rather than showing stability or a gradual upward trend
  • You are self-employed and have not yet filed a tax return, or have less than 3 years of demonstrable income
  • You are self-employed and used creative accounting methods to lower your recorded income for tax purposes, thereby reducing your income figure

Rejected because of the terms of your mortgage

A mortgage must be deemed suitable for your circumstances to have any chance of being approved. Seeking and following professional advice is highly recommended to ensure this.

Your application may be declined if:

  • You rejected or did not ask for mortgage advice
  • You asked to borrow too much
  • You borrowed too close to the lender’s maximum LTV ratio
  • You started looking for mortgages before you’d settled on a property price bracket, and they were not suitable
  • You are looking to move into a non-traditional property: properties deemed likely to be hard to resell are often harder to mortgage

Rejected because of your behaviour

You must demonstrate understanding of and engagement with the process, and that you will not be hard to work with.

Showing you understand the process and have the legal right to borrow and live in the UK is vital: a passport and proof of address will help with this. Your name must be on the electoral register to have any chance of getting a mortgage.

The lender may want to get hold of you to discuss the application after submission, too; ensure you’re reachable.

Your application may be declined if:

  • Your paperwork was submitted incorrectly
  • You are not registered to vote
  • You took out a payday loan within 6 months of submitting the application
  • You engaged in betting within 6 months of submitting an application
  • You went on holiday around the time of submitting your application (this also demonstrates extravagant spending)

In conclusion...

Applying for a mortgage is rarely a smooth ride, but preparation is key! Taking the time to read this guide and to understand each step of the application process will make the whole thing less painful.

And remember, patience is key. If you come across a hurdle or, god forbid, get rejected, take a deep breath, find out what went wrong, and try again.

If you have any questions about applying for a mortgage, or any other aspect of the house buying process, get in touch with our team of experts. We’ll be happy to help.