First time mortgage - process & rates

Question

I'm looking to buy a first home in the next few months. At this point I thought I would check out the mortgage options as in my mind I'd need to have a mortgage agreed before going to look at houses.

On calling my bank, they said they can only do a phone interview (which in my mind isn't much beyond an online mortgage calculator) and that I would only need to actually 'apply' once I have had an offer accepted.

My question is multipart:

1. Am I wrong about the process? it seems chicken and egg to me, how can I put an offer in if I don't know I have a mortgage available?

2. I'd like to speak to an advisor as there are a few ways I can juggle my finances in the next 3-6 months and I'd like to understand the impact of these (for example I could apply as just me, or me and my girlfriend and I need to understand if her income on top of mine will benefit the application). The bank don't seem to offer me this, so what's the best option to find the answer to these kind of questions (ideally free!)

3. How can I rate shop / find the best deal if I don't know the answer to to types of question from point 2 and therefore don't know which mortgages would be available?

An example if what I'm trying to describe would be this (fictional numbers):

Say I can apply individually and get a mortgage for £100,000 with a rate of 10%, but if I apply with my girlfriend we could get a mortgage of £150,00 with a rate of 20%. We'd then maybe think that getting a lower priced house would both benefit the interest and would adjust our property search appropriately.

I don't see how I can do this, without understanding in more detail than I currently have (or am being offered).

Answer 1

I'd need to have a mortgage agreed before going to look at houses

Wrong. You can look at houses without a mortgage in principle, but you would be at a disadvantage to people who do have one.

Mortgage in Principle

they said they can only do a phone interview

That is plausible because they have your financial information with them, so you don't need to meet them in person. And yes you only apply after you have put down an offer and your offer has been accepted. And don't stop yourself to one bank, check other banks too. Go to the bank where you can get a good deal.

Am I wrong about the process? it seems chicken and egg to me, how can I put an offer in if I don't know I have a mortgage available?

No you have a mortgage in principle, means the bank mentions how much you can afford depending on your current circumstances (how much initial deposit, term etc) and how much they are willing to lend you. As you declare all the details, which you will give while applying for a mortgage, so it is more or less a done deal(but not always, if you hide something or your monetary situation changes).

I'd like to speak to an advisor as there are a few ways I can juggle my finances in the next 3-6 months and I'd like to understand the impact of these (for example I could apply as just me, or me and my girlfriend and I need to understand if her income on top of mine will benefit the application, even as she has a fairly high amount of outstanding debt). The bank don't seem to offer me this, so what's the best option to find the answer to these kind of questions (ideally free!)

If you can spend time and shop around you don't need an advisor. They willn't and cannot make mortgages come through. Primarily they do the shopping for you. They have specialized software which helps them to do that in one place. Some charge around £200 - £300, so can be used.

How can I rate shop / find the best deal if I don't know the answer to to types of question from point 2 and therefore don't know which mortgages would be available?

Use comparison websites i.e. gocompare, comparethemarket, moneysupermarket. Check out the deals, terms and conditions and other points and get in touch with the bank. They can give you a rough idea of how much you can borrow.

I would say trawl the internet and make yourself aware of all the facts.

Answer 2

Remember that a large part of what goes into a Bank's willingness to lend is not just your credit score - it's the house itself. There's a big difference between lending you $150,000 on a house worth $200,000 in a neighborhood where prices look to be trending up, and lending you $150,000 on a house worth $180,000 in a neighborhood where sales are more difficult. There's a difference between buying a house that's 100 years old and a house that's 5 years old. What the appraiser says goes a long way to determine willingness to lend; even a well-off person capable of buying a house for cash (but choosing a mortgage thanks to the low interest rates) will have a hard time getting a mortgage on some houses.

As a result, while the bank will happily (and likes to) tell you how much it's willing to lend you based on your attributes (credit, assets, income), it's not willing to explicitly give you a mortgage without looking at the property. And since the underwriting process (where they make final determinations) is somewhat costly to go through, the bank is unlikely to want to do that twice (without charging more, at least).

This is primarily the difference between a secured and an unsecured loan for this kind of amount - the latter is based entirely on your likelihood to repay, the former takes the value of the property into account. Homes are not very fungible and are very high dollar value, meaning in both cases that they have to be appraised and considered separately (for the bank to have a good idea of what risks it's taking). A car loan you often can get pre-approval for simply because it's a much lower amount, and cars are fairly fungible - a car that is bought for $20k today is roughly the same as all other $20k cars, within reasonable limits, and the net risk from your loan is less (as well as the net gain from your loan probably higher - mortgage rates tend to be lower than non-manufacturer sponsored car loans).

You certainly can get "pre-approval" (US) or an agreement in principal (UK), and particularly if you are a first-time homebuyer who may not look like a highly attractive buyer that may help significantly. After all, if the seller agrees to sell and then you don't get approved, the seller is out time and possibly money (since perhaps a good alternative exists).

Answer 3

Maybe things are different in the UK, so take this with a grain of salt, but here in the U.S., the conventional thing to do is to go to your bank and get a "pre-approval". The bank looks over your finances and says that this is the amount that they could approve a mortgage for at such-and-such a rate.

With that in hand you go look for a house. Normally a pre-approval is an upper limit. If the bank will approve you for, say, $200,000, this doesn't mean that you MUST buy a $200,000 house. Normally you want to spend significantly less. In my experience, the bank has always approved me for WAY more than I really wanted to spend. Remember the approved amount is not what a wise person would spend on a house. It's the extreme case, the most that they think you are likely to be able to replay. Of course you normally want some room to maneuver. If you decide that you can reasonably afford $100,000, you probably don't want to get a pre-approval for $100,000, because what happens if you see a house you love and the seller's absolute lower limit is $105,000?

I've never done a pre-approval over the phone, I've always gone to the bank and met with a lending officer. But I suppose there's no reason why it couldn't be done over the phone. Maybe that's how banks work in the UK, or maybe that's just how your bank works. As long as they'll give you a pre-approval number at the end of the process, I guess it doesn't matter. Unless you just really like visiting the bank's office to see the pretty tellers.

If you have a good idea what you can afford and what a bank is likely to approve, you can certainly go house-hunting without having a pre-approval. I bought my first couple of houses this way. Again, speaking of the US, banks have some pretty simple formulas they apply. It used to be that the mortgage payment can't be more than 25% of your monthly income and your total debt, the new mortgage plus any existing debt payments, can't be more than 33%. I don't know if that same formula is still used, but if not they probably have something similar. A realtor can surely tell you the guidelines. If you're safely within them, and you haven't recently had a bankruptcy or some other special negative circumstances, then you don't really need a pre-approval.

As Joe says, the bank will want to get the house appraised, and regardless of any pre-approval, they won't normally give you a mortgage that's more than the value of the house.

And yes, if you're buying a house with your girlfriend, it would be a good idea to have a formal legal agreement in place about what happens when you split up. You don't want to be in a position where you're forced to sell the house at a loss if you happen to break up at a time when the market is bad. And "we'll work it out when and if the time comes" is probably not a good plan. If you're breaking up, it MAY be a totally amicable separation ... or it may not.