First time buyer? Here's how to get mortgage ready

Buying your first home is an exciting milestone, but it can also feel overwhelming. Being mortgage-ready involves several key steps to ensure you are in the best position to secure a mortgage and purchase your dream home. Here are some essential tips to help you get started.

Understanding your financial situation

Before you begin the mortgage application process, it's crucial to have a clear understanding of your financial situation. This includes knowing your income, expenses, and any existing debts. Lenders will assess your financial health to determine your ability to repay the mortgage.

1. Check your credit score: Your credit score plays a significant role in the mortgage approval process. A higher credit score can help you secure better interest rates and terms. Obtain a copy of your credit report and check for any errors or discrepancies that need to be addressed.
2. Calculate your debt-to-income ratio: Lenders use your debt-to-income (DTI) ratio to assess your ability to manage monthly mortgage payments. Calculate your DTI by dividing your total monthly debt payments by your gross monthly income. Aim for a DTI ratio of 43% or lower.
3. Save for a deposit: Saving for a deposit is critical in getting mortgage-ready. Most lenders require a deposit of at least 10% of the home's purchase price. The more you can save, the better your chances of securing favourable mortgage terms.

Demonstrating repayment capacity

Lenders need to see that you have the financial capability to meet your mortgage commitments. This is known as repayment capacity.

1. Show consistent savings: Demonstrate your ability to save consistently over time. Set up a separate savings account and make regular deposits. Avoid withdrawing from your savings unless absolutely necessary.
2. Provide evidence of rent payments: If you are currently renting, provide proof of your monthly rent payments through bank statements. This shows lenders that you have a track record of meeting regular financial commitments.
3. Clear existing debts: If you have any outstanding loans, aim to clear them before applying for a mortgage. This can improve your DTI ratio and demonstrate your financial responsibility.

Preparing your documentation

Having all the necessary documentation ready can streamline the mortgage application process and increase your chances of approval.

1. Proof of income: Gather documents that prove your income, such as payslips, tax returns, and bank statements. Lenders will use this information to assess your ability to repay the mortgage.
2. Proof of savings: Provide evidence of your savings, including bank statements and savings account records. This shows lenders that you have the funds available for a deposit and other associated costs.
3. Credit report: Obtain a copy of your credit report and be prepared to provide it to lenders. This helps them assess your creditworthiness and financial history.

Additional tips for first-time buyers

Before you begin the mortgage application process, it's crucial to have a clear understanding of your financial situation. This includes knowing your income, expenses, and any existing debts. Lenders will assess your financial health to determine your ability to repay the mortgage.

1. Understand lending rules: As a first-time buyer, you can borrow up to four times your gross income. You need a minimum deposit of 10% of the purchase price, resulting in a maximum loan-to-value (LTV) of 90%.
2. Know your deposit sources: Your deposit can come from various sources, including savings, gifts, inheritance, sale of shares, or the Help to Buy scheme. The source of your deposit will need to be verified by the lender.
3. Available schemes: First-time buyers can benefit from schemes like the Help to Buy scheme, which can be used towards your 10% deposit. This scheme offers a tax rebate of income and DIRT tax paid in the previous four years, with a maximum rebate of €30,000 or 10% of the purchase price. Another option is the Shared Equity Scheme, which aims to bridge the gap between your deposit, mortgage, and the price of the new home.
4. Factor in additional costs: Be prepared for extra costs such as legal fees (budget at least €2,000 - €2,500), stamp duty (1% of the purchase price), valuation fees, and structural survey/snags.
5. Use a broker: Engaging with a mortgage broker can provide an unbiased, whole-of-market view and save you time and effort. Unlike banks that only offer their own products, brokers can give advice on products from multiple lenders.

Conclusion

Getting mortgage-ready involves careful planning and preparation. By understanding your financial situation, demonstrating repayment capacity, and preparing the necessary documentation, you can increase your chances of securing a mortgage and purchasing your first home.