How To Buy Your First Home In Five Easy Steps
How To Buy Your First Home In Five Easy Steps
You have money saved, a polished credit score, and a code-red addiction to home renovation programmes. You are ready to settle into home-ownership. Where do you start? What questions do you ask and to whom? We are going back to basics: once you’ve decided to buy, how on earth do you go about it?
Step 1. Work out how much you have to spend.
Before you act on your first instinct to rush out to view your dream house, you must first establish your budget. If you are unsure how much you can spend, you will quickly be deemed a time-waster by estate agents as this will be their first question.
There are two things to consider here: how much will your mortgage provider lend you, and how much is your deposit, making reasonable allowances for the other costs associated with buying a property.
To find out how much you can borrow, you need to get an Agreement in Principle.
Your mortgage adviser will answer questions about your income and expenditure, so it is a good idea to have accurate figures of how much you earn and any outstanding debt you owe, including balances on credit cards and overdrafts. You will undergo a ‘soft’ credit search, which means the lender checks you out but the search will not negatively impact your credit score.
The provider will then give you an Agreement in Principle, showing the maximum they would be willing to lend you based on what you have told them. It will also tell you the size of deposit they need, as a percentage of your purchase price. It will not tell you what interest rate, term or repayment type your mortgage will be. You will find this out later, as well as how much your monthly payments will be.
You will need to set aside money for:
• Solicitor fees – up to around £1500
• Stamp duty for properties valued at £125,000 or more (though you may not have to pay anything if you are a first time buyer)
• Removal firm fees – around £500
• Valuation/Survey fees – Mortgage providers will insist on a basic valuation survey and the cost will depend on how much the property is worth. You may also want to get additional surveys which will have their own fees.
• Mortgages sometimes have an arrangement fee
• You may want to set aside money to renovate/decorate your home when you move in.
Now, once you have taken all those costs into account, you can use your remaining cash as a deposit. Most lenders will insist on a 10% deposit, and will give you a mortgage for the remaining 90%. However, you may need a larger percentage if your credit score is in poor shape.
For example, if you have £12,000 to use for your deposit, and the lender agrees to fund a 90% mortgage of £108,000, you could purchase a property costing £120,000. However, if your credit score is poor, the lender may view your mortgage as a bigger risk, and could offer, say, an 80% mortgage of £60,000, meaning your maximum purchase price will be £72,000. Your income will not change how the lender views this. In other words, even if you earn loads of money and feel you could afford to borrow more, your credit score will determine the percentage of the purchase price that they will offer you.
Step 2. Go house-hunting and make an offer
Hopefully you will find the house of your dreams during this stage, and once you do, it will be time to make an offer. You make your offer through the estate agent handling the sale, and wait for them to speak with the vendor (seller) to see if they will accept it. Other hopefuls may come in with counter-offers, and you can get into a bidding war. This is why your budget is so important – do not bid more than you can afford.
There are no hard and fast rules on how much to offer, and the best move largely depends on the individual circumstances and the climate of the housing market. Generally speaking though, estate agents will spot someone who thinks they’re bidding cleverly in an attempt to get a lower price at 100 paces and they will not appreciate it.
Step 3. Sort out your mortgage and conveyancing (legal work)
Yay! Your offer is accepted and you are eager to get the ball rolling.
You will need to hire a solicitor to do their bits and bobs in the background – more on them later. Now is also the time to go back to your adviser and tell them you have found a property.
You will go through a more comprehensive interview about your income and expenditure, and will undergo a full credit check. You will have to provide documents to support what you have told the adviser, and they may contact your employer. Do not panic if this happens, it is not unusual and the employer is asked to fill in a standard form about your income. The lender will check you out as a borrower first to make sure they are happy to lend to you and only then will they look at the property with a survey. This part of the process can be lengthy. You can keep waiting to a minimum by providing as much information and supporting documents as possible at your interview, and by arranging to stay in regular contact with your adviser. Your adviser is also the person to ask about arranging insurance. You will need buildings cover as a condition of the mortgage, and you may benefit from additional protection products as well.
Lenders will arrange the survey (though you will choose which kind you want and you will pay for it), and it will usually take a few days for the report to come back. If the report is ok and the property has been valued the same as the purchase price, the mortgage will be ready to go.
Step 4. Sign your contract and pay your deposit
You have your mortgage offer which is your green light that the mortgage is ready to go – the hardest part is over.
Provided your solicitor has finished doing their various searches, and the vendor is ready, you will now pay your deposit and exchange contracts. You pay the deposit to your solicitor by cheque, though this is frequently done via transfer or CHAPS payment nowadays as it transfers the money the same day. You can do this at one of your bank’s local branches.
When you sign your contract, you have passed the point of no return – you are committed to buy the property. For this reason it is a good idea to have your buildings cover (and other insurances you need) in place from the day you sign.
Step 5. Wait for your completion date, and then collect your keys
You will have agreed a completion date (the day the property becomes yours) when signing the contract. The solicitor will contact your lender to request the mortgage funds. They usually ask for the money to be sent the day before your completion date. It is a good idea to give your lender a ring to make sure they have done this. You can make arrangements for your ‘moving in’ day, and wait for the joyous call from the estate agent letting you know you can go to them to collect your keys. Congratulations – you are officially a homeowner!
The purpose of this feature is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.