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Mortgages: The Application Process

By now, you’ve probably scoured every property app and website as well as every estate agent window and you’ve got your shortlist of dream future homes.

However, try not to get ahead of yourself because remember, to secure one of these dream homes, you’ll need to have your mortgage application approved in principle. We’ll go through this and how to find the right lender for you in this section.

Arranging a mortgage yourself

It’s possible to arrange a mortgage directly with a building society, bank or other financial organisation. In fact, this is a path that many people take as it could offer advantages such as cutting out broker.

However, you may find that the cons of arranging a mortgage yourself outweigh the pros. You could find, for example, that you have a limited choice of products to choose from, or that you don’t get the best deal available.

In short, the pros and cons of doing it direct yourself are:

  • Pro – no broker fees.
  • Pro – some exclusive ‘direct-only’ deals may be available.
  • Con – advice is not impartial.
  • Con – you may miss out on deals available only to brokers.
  • Con – you have to ‘research’ the market which can be time-consuming.

Using a broker

Today, the mortgage market is extremely competitive, and it’s not always easy to understand exactly what’s on offer. This is where a mortgage broker (also called a mortgage adviser) could help. A broker is essentially a qualified expert who helps you assess the available options in order to find the best mortgage deal for your particular circumstances. A broker could also help you arrange the mortgage, once you’ve made a decision.

Types of broker

Not all brokers are the same. In fact, there are three types of mortgage broker regulated by the FCA (Financial Conduct Authority). These are:

  • Tied brokers – recommend products from a single lender.
  • Multi-tied brokers – recommend products from a selected range of lenders.
  • Whole-of -market brokers – ‘independent’ advisers with access to all products on the market that are available to mortgage brokers.

The easiest way to find out if a broker is tied or independent is to simply ask. A broker must tell you if there are limits to which mortgages they recommend.

Benefits of using a broker

  • Access to all the options: the mortgage market is vast and complex. While it’s possible to do some research yourself, an independent (whole of market) broker has easy access to the widest range of options out there and could help you choose one that’s best for you.
  • Saves time: a more highly regulated market means more administration. A broker might help you deal with this more quickly, and with less hassle.
  • Get it right first time: different lenders have different definitions of income – for instance, pensions, investments and other assets may or may not be taken into account. Brokers are experienced in presenting your finances in the strongest possible way, so may help prove to the lender you could afford a mortgage.
  • You’re protected: your mortgage broker has a duty of care to you. They have to justify why the particular mortgage they have chosen is right for you. If their advice is not up to scratch, you could seek compensation [1].
  • A broker is on your side: brokers aren’t on the lender’s side, they’re on yours, and they could give you access to far more products than if you went direct.

Mortgage brokers are required to be open with you about any fees or commission they charge or earn. Again, it’s perfectly acceptable and widely advised that you ask how they make their money.

Pros and cons of using a broker

  • Pro – access to ‘whole-of-market‘ products via the right broker
  • Pro – some deals are exclusive to brokers
  • Pro – a broker does the research for you
  • Con – you could only guarantee impartial advice with a broker that isn’t tied to a particular lender
  • Con – you’ll have no access to special direct-only deals
  • Con – you may be charged a fee

Mortgage in Principle or ‘Decision in Principle’

Because the process of arranging a mortgage could take time, many buyers get a ‘Decision in Principle’ – rather confusingly, sometimes also called an ‘Agreement in Principle’ (AIP) or ‘Mortgage in Principle’, before starting their hunt for a home.

This is a confirmation from the lender that they could, in principle, be prepared to lend you the money you need. It is based on information that is a lot more basic than with a full mortgage application, and is usually a quick and straightforward process [2].

Many sellers ask to see a DIP before viewing a property, as it gives them assurance that the buyer doesn’t have a poor credit history and is more likely to get accepted for a mortgage.

The benefits of getting a decision in principle are [3]:

  • It shows sellers that you could, in theory, buy a property, which strengthens your bargaining position, giving you more confidence as a buyer when making an offer.
  • It demonstrates you are likely to have a suitable credit score (a soft credit check needs to be run to generate a DIP). This means, if you’ve had credit problems, a DIP could give you reassurance about your borrowing prospects.
  • It helps you to set a realistic goal in terms of the value of the property you could afford.
  • It’s free and anyone could get the DIP done: it’s very simple and easy to obtain.
  • No commitment is necessary: an individual doesn’t need to start a mortgage application or have an offer accepted to generate a DIP.

Having said that, there are things to consider when getting a DIP:

  • A DIP is never a guarantee – the lender may ultimately decide not to lend to you.
  • Some (not all) DIPs might affect your credit rating. Therefore, consider how many DIP applications you make.
  • Interest rates could change in the time between obtaining a DIP and getting an actual mortgage which may affect the lender’s decision.
  • The DIP is only valid for 90 days, so if your house search continues for longer than this, you’ll need to re-apply for a new one.

Where next?

So you’ve read through everything you need to do to prepare to buy your new home, so you’re fully clued up. Now, it’s time for the fun part – actually looking for a home you’ll love. We’ll go through what you need to be aware of when finding your new home and making that all important offer next in the Property section.

Appendix

  1. FSCS – Compensation Limits
  2. Home Owners Alliance – Do I need a Mortgage Agreement in Principle?
  3. Home Owners Alliance – Do I need a Mortgage Agreement in Principle?

Additional Sources

  1. Mortgage Advice Bureau – Mortgage bankers vs mortgage brokers: why use a mortgage broker?
  2. Money Advice Service – Mortgage advice- Should you get a mortgage adviser?
  3. Which? – What is a mortgage agreement in principle (AIP)? – March 2020
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