First Time Buyers
First Time Buyer Mortgage
Requirements for First Time Buyer mortgage applications
The approach varies between lenders and there’s never a one-size fits all approach. I can give you a generalisation, but it isn’t gospel. If your circumstances are a bit unusual then there may still be some options out there for you.
The first requirement to apply for a mortgage as a First Time Buyer is a deposit. This can be gifted, or saved from your own resources. There may be some lenders that consider zero deposit under the right circumstances, but they’re very specific and very unique.
You’d normally need to have your income all sorted and to clarify your expenditure so that the lenders can comfortably see your earnings and how affordable the mortgage is.
Maximum mortgage and minimum deposit for First Time Buyers?
There’s not really a set borrowing figure for First Time Buyers. It’s all based around what you earn. It’s normally around 4.5 times your gross annual income. if it’s a joint application, that’s the combined gross annual income.
Some lenders can be a little bit more generous if you’re a higher earner – they might go close to 4.75 or maybe even five times, but they’re few and far between. And if you’re self-employed, that opens up a whole different area of how income will be assessed.
That is not a simple case of showing your bank statements. Some lenders will use your personal drawings from the business – any salary and dividends or profit from your self-employment. Some lenders will look at the profit of the business as a whole. We’d need to do a whole own podcast to go through the nuances of self-employed mortgages!
What deposit will I need as a First Time Buyer?
Assuming you have clean credit then you can very often get away with a 5% deposit. if you’ve got credit issues or other complexities then those deposit requirements may increase – but they’re specific to each individual lender.
There are a couple of instances where you can get on the property ladder with no deposit as a First Time Buyer. There’s one particular lender out there at the time of speaking today (16 April 2024) which offers a product where if you’ve been renting and paying bills for 12 months they can consider you without putting down a single penny in deposit.
There are also other options where if you have a family who can either put up cash or collateral as equity in another property, lenders can use that as additional security for a few years in place of a deposit.
What types of interest rates are available for First Time Buyers?
The types of rates are no different to those who are remortgaging or are already homeowners. Fixed rates tend to be the most popular. That’s where you set your rate for a certain amount of time and the rate and repayment will not change during that period.
You can also get variable rate products which can potentially go up or down in line with the mortgage market. There are tracker rates which are usually linked to the Bank of England base rate. Whenever that benchmark increases or decreases, your interest rate can increase or decrease as well.
There are also more options like discounted rates and capped rates which vary in line with other benchmarks. With a discount your rate is a set percentage lower than a certain benchmark. It’s usually the lender’s standard variable rate with a discount of x per cent.
Pros and cons of fixed vs. variable rate mortgages?
There are pros and cons to both options. What is right for somebody may not be right for somebody else.
With a fixed rate, the pros are that you’ve got stability and security of knowing exactly what your monthly payment will be, and for exactly how long. It enables you to budget a lot more effectively on a month-to-month basis.
The cons are that if interest rates on the market decrease, your rate will not decrease. But if rates increase your rate will not – there’s risk and reward to both avenues.
With a variable rate it’s the opposite. There’s no set number of times that it can increase or decrease – it could go up and down every month if the lender really wanted to do that.
The pros are that if lenders reduce their interest rates, your mortgage payment will likely go down, and the overall amount of interest that you would pay would decrease over time – so it could be quids in for you. The flip side is that if the lender increases their rates, your repayment will go up.
If stability and security of monthly payments is your preference, you won’t get that with a variable rate. You could get a letter through the door at any moment increasing your rate.
What government schemes are available to help our First Time Buyers out?
One that’s predominantly used by First Time Buyers is the shared ownership scheme. It’s designed for people who want to get on the property ladder but don’t necessarily have enough deposit for the kind of property that they’re looking for.
For example, a young family with children can’t live in a one or two bedroom flat because there’s not enough room. But the three-bed semi with a garden that they want is outside their price range.
With the shared ownership scheme they could buy a part of the property – 20%, 30%, 40% or however much they can afford to buy. They would rent the rest. You only put down a deposit for a percentage of the share you’re buying.
If you’re buying a 40% share of a £100,000 house and you need a 10% deposit, that 10% is only based on that 40% share. So you would only need £4,000.
So if you’ve only got a small deposit, you can still get on the property ladder now. It’s not bespoke to First Time Buyers – other people can use it. But given the nature of the scheme and the target market it’s often used by First Time Buyers.
There’s also another scheme out there and although not many lenders are using it, more are getting on board with it. It’s where affordability can be a little bit more generous for First Time Buyers if they go for a long-term fixed rate. It’s not strictly speaking a government-backed one but it is a potentially helpful scheme.
What documents are needed for First Time Buyer mortgage preapproval?
Something lenders like to see a lot from First Time Buyers is evidence that you can manage monthly payments. If you’re not a First Time Buyer and you’re remortgaging, you’re going to have a credit history and bank statements showing your mortgage payments and council tax.
If you’re a First Time Buyer and you’re still living at home, then the bills are all going to be paid by your parents. So sometimes it can be difficult for lenders to see how you can budget and manage a mortgage payment when you’ve not been paying rent or bills.
So apart from the standard things like your ID, payslips and bank statements, it’s important to make sure that you’re evidencing that you can budget and manage your money properly.
SPEAK TO AN EXPERT
What are the steps to follow when applying for a mortgage?
The first step when you’re getting on the property ladder as a First Time Buyer is to find out what your borrowing power is. The last thing you want to do is fall in love with your dream house on Rightmove and then find out that it’s not within your price range. I’ve seen that happen before.
So speak to brokers like ourselves, or whichever professional you prefer to use. We can look through your income and expenditure and tell you what your mortgage affordability is. The next step after that is to get the Agreement in Principle, which is essentially pre-approval from a mortgage lender.
We tell them all about you, what you’re looking to do and your income and they’ll do a credit search. If they’re happy with everything we’ve told them they’ll grant an Agreement in Principle – it’s another word for pre-approval.
After that, we need your documents, we do the full mortgage application and a survey. If you’re happy with all of that, it goes to a full mortgage offer. Then it’s over to the solicitors to do all the legal bits and make the necessary arrangements with the vendor.
Common mistakes First Time Buyers make when applying for a mortgage?
The biggest thing is what I mentioned earlier about bank statement conduct. Because if you’re living at home, you’ve got nothing to evidence to the lenders that you know how to budget.
I’ve had cases in the past where an applicant had a perfectly clean credit history and a good deposit. On their bank statements, they might be paying £100 to mum and dad and at the end of the month they’ve got £50 left.
An underwriter is looking at that case thinking, they’ve got no overheads but they’re still almost running their account to zero at the end of the month. How can they afford a £700 a month mortgage payment plus council tax, gas and electricity?
Cases can get declined for that reason alone. So make sure your bank statements are as healthy looking as they can be.
What happens if First Time Buyers miss a mortgage payment?
It’s the same with any kind of missed payment or arrears on anything. There’s a good possibility that it will get marked as a missed payment on your credit report – which can make remortgaging options in future or additional borrowing difficult.
It may mean that you might have to go to lenders who won’t offer us as favourable terms as high street lenders.
In terms of what happens with the lender when you miss a payment, you’ll potentially probably get a phone call from the lender to see if everything’s okay. They will check you’re not going into financial difficulty and want to understand why the mortgage payment was missed.
If it was a one-off and you bring it back into line, normally you’ll be okay, but the approach varies between lenders. If you keep missing consecutive payments the lenders can start to be concerned that you’re going into financial difficulty. If it goes too far in arrears, there’s a possibility you might default on the mortgage. If that happens, it can have very serious consequences for your credit history and for the lender. In the worst case scenario, the lender could take repossession action.
Can First Time Buyers quality for a mortgage with bad credit?
You definitely can. There are myriad lenders out there who would happily lend to a First Time Buyer with bad credit.
Bad credit itself is a very wide subject. It depends on the specific nature of the bad credit. For example, if it’s a couple of missed payments a few years ago, you’ll have better options than if you’ve got an IVA on your credit file.
Most lenders don’t work off of a score. That score you see on Experian or Equifax or Clearscore isn’t necessarily important. Lenders have set criteria around the number of defaults within a certain number of years. No two lenders are the same, so one may not want to touch you with a bargepole, while with another you may be the exact kind of business they’re after.
So yes you can qualify for a mortgage as a First Time Buyer with bad credit. But the kind of mortgage, the rates and the deposit you’ll need will depend on the specific nature of the issue.
There will more than likely be an option out there for you, but there’ll be certain circumstances where the credit history, deposit requirements and everything might not tally up for you.
Can I get a Buy to Let mortgage as a First Time Buyer?
The short answer is yes, but the longer answer is that it’s going to be a little bit more bespoke with certain lenders. You’re probably not going to get the best rates on the market as a First Time Buyer / first time landlord, because most lenders want you to have a year or two’s landlording experience under your belt.
There are still some very competitive lenders out there who will consider giving you a Buy to Let mortgage as a First Time Buyer. It also depends on what type of Buy to Let you’re looking to get. If it’s a standard residential dwelling to let out to a family, you’ll have more options than if you were looking to purchase a House of Multiple Occupancy or a holiday let.
How can a broker help with First Time Buyer mortgage applications?
This is our job. We know what we’re doing. Basically there’s dozens upon dozens of lenders out there. If your circumstances are a bit unique or not quite straightforward, it can be a stumbling block for some people. But it’s almost certainly come across our desk before so we know the lenders that will be good for it.
We have the knowledge of who will do what in the mortgage industry, and who will offer you the most suitable terms. We also help with managing the process as well – it can be very daunting for a First Time Buyer. If you don’t know what the process involves it can feel like navigating a minefield. But we know our way through it with our eyes closed.
Having someone with that experience managing things for you can just make the whole process smoother and more straightforward. We’ll ensure you access the most suitable deal for you – with so many lenders out there, a good deal may potentially slip through the net if you do your own research.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up with your mortgage repayments.
You may have to pay an early repayment charge to your existing lender if you remortgage.
