Young, Self Employed, No Accounts And No Savings. How Did I Get A Mortgage?
I was having considerable problems getting a mortgage to buy my first home about four years ago. If I was to believe everything I had heard, I was the ideal candidate for a mortgage – young, a first-time buyer and with an annual income of about 30k. Easy!
No, not easy, actually. Being young with a leaning towards enjoying myself, I had no savings – nothing to use as a deposit. But what about these 100% mortgages I had been hearing about? Surely I qualified? Oh, there was something else – I was also self employed with no accounts.
Self employed with no accounts and no savings.
Could I get a mortgage? It was virtually impossible. Not a single High Street lender would give me a mortgage. Even my bank who have had my services for ten years turned me down; even though my bank knew exactly how much I earned each year and how much I spent each week; even though my bank knew that making the monthly payments on a repayment mortgage would not be an big problem for me.
Then I heard about Self Certification Mortgages.
What is a Self Certification Mortgage? It’s essentially a mortgage whereby you decide whether or not you are capable of making the repayments. And that is when the penny dropped, because you see the entire process of applying for a mortgage is premised upon an institution (such as your bank) deciding whether or not you are able to make the monthly repayments.
And what is the formula for working this out? Well, if you are employed it is your salary – a bank will lend you, say, 3 or 4 times your annual salary. Normally they will ask you for a small deposit, say 5%, to demonstrate that your intentions are serious.
Obviously, if you are self employed, and particularly with no accounts, you often do not have an annual salary and you are unable to demonstrate regular monthly income. Many self employed people – notably me – live hand-to-mouth, regularly waiting for reluctant clients to settle outstanding invoices. So how can your ability to repay a mortgage be judged? I discovered that self certification was the answer – i.e. YOU. You make a judgement as to whether or not you are borrowing too much money and whether or not you will be able to afford the monthly repayments. After all, if you are bright enough to run your own business, manage your own tax affairs, handle purchasing and invoicing, surely you are bright enough to work out whether you can repay your mortgage!
Think about it – conventional, salary-based mortgages are judged on the basis of what a person has earned in the past, but a person could be made unemployed within hours of securing a mortgage. On the other hand, Self Certification puts the onus on you predicting what you will earn in the future. Sure, you could go out of business, but a salaried person could also lose their job.
So I thought, well this is good, but I bet that a Self Certification Mortgage is the stuff of loan sharks, with huge interest rates, crushing monthly repayments and Guantanemo-style penalties.
But there was something else I discovered about mortgages. Although the High Street is swamped by lenders, there are only actually a very small number of ‘actual’ lenders: the majority are intermediaries acting on their behalf, because the number of mortgage applications is so great that intermediaries are required to perform the process of judging each applicant and assessing risk.
So I discovered that whereas a High Street lender would turn me down, a smaller lender might accept me. But get this: the mortgage that I actually received from the small lender at the end of the day was exactly the same as the mortgage which had been refused me by the High Street lender! Only the forumla for judging my ability to repay the mortgage was different, not the mortgage itself!
So what’s the catch with Self Cerftification? There is always a catch in my experience, and in this instance it was a very big catch. Whereas a regular mortgage requires the borrower to contribute a deposit of, say, 5%, my Self Certification Mortgage required a deposit of 15%. Fifteen percent!! Of course I can see why they ask for this, why if you are not being judged using the conventional formula you are expected to show some serious committment. But I didn’t have any savings. I was young and self employed for crying out loud.
So what did I do? Okay, I would not recommend this to everybody, but I was desperate for my own home and I knew that I could afford the repayments. I took out a Personal Loan shortly before my mortgage application and, supplemented with a timely invoice payment, I was able to pay the deposit and afford the key refurbishment costs on the property (roof, re-wiring, plumbing etc).
On the High Street this would be called a Home Improvement Loan and acquired AFTER you have obtained a mortgage and purchased the property. I simply borrowed a little more in the form of a Personal Loan before I had acquired a mortgage. I was fortunate in that I could afford to carry the costs of these repayments for the forseeable future and I had bought on a rising market – the value of my property was already more than the mortgage and personal loan combined before I had even finished the refurbishment (ie. 4 months after buying the property). I would not recommend this to everyone, and you have to be very, very clear about how much you are borrowing and what the total repayments will be.
However, getting on the property ladder and having my own home was the most important thing to me, and it just goes to show that if you look beyond the High Street you can actually find the same or similar financial products but with less of the hassle. The High Street had always made me feel inadequate, a financial failure
You might be interested to know that, because I was still looking for the catch in my Self Certification Mortgage, I went to a respected, independent financial advisor recently (on the High Street as it happens) and asked if I should change my mortgage to something better. His advice was that I had got a very good mortgage deal and that I should stick with it for the forseeable future. So I have.
Richard
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What the bank won’t tell you about your home mortgage quote
Shopping for a house is probably the most significant financial decision that you will make in your life. When you shop for your home by first attaining a home mortgage quote, your decision becomes even more momentousyou need to perform a balancing act between the house of your dreams and factors such as the down payment and interest rate payable.
Your first stop in this process will probably be your bank. This is the most obvious option, but may not always be the right one; there are things your banker will not tell you about a home mortgage quote. In other words, the home mortgage quote that is good for your banker may not be the best one for you.
Prevailing interest rates
Take the issue of interest rates. Rates fluctuate according to market exigencies. When you start your negotiations for a home mortgage quote, the interest rate might be higher than at the time you actually avail the loan. You must keep a track of such fluctuations, and induce the bank to provide you with the advantage of the prevailing rate. Your lender may not tell you this, but the difference could mean several hundred extra pounds. Therefore, it is always a good practice to consider alternative information sources before finalizing the home mortgage quote, and then compare rates on offer. With easy access to the Internet, you can even generate online quotes from web sites. This exercise will help you prepare well for negotiating with your banker regarding the interest rate.
Mortgage tenure
The mortgage tenure is another important question that you need to query. From the point of view of the bank, a 30-year fixed rate is most suitable because it can bring in returns of up to 4-5 percent for the bank. However, is it good for you? If you are looking to refinance in a period of about seven years, a 30-year rate is a disadvantage because you would be keeping the loan for only seven years.
Hidden fees and levies
Once you have finalized the purchase of the house and the interest rate with the bank, you would think that getting the right home mortgage quote is guaranteed. However, you need to watch out for those hidden fees or add-ons, which your banker might not have explained at the outset: loan processing fees, warranties, insurance, and the like. It always pays to put these issues on the table before finalizing the home mortgage quote.
Disproportionate service charges
In your market research for the right home mortgage quote, your focus is obviously the lowest interest rate. However, this should not be your only guide because some banks attract customers with the offer of a low rate, but may levy charges for services that are non-existent. A real-world experience is of a Fairfield, Conn., graphic designer who discovered that his bank charges fees for services such as lender inspection and notary at a rate much higher than normally acceptable. It is a prudent step to compare the complete fee package before committing to a quote. It is important to remember that lenders often offer to waive a particular fee levied by your bank in an effort to close the deal. So, it is important to recognize such opportunities and press home the advantage.
Besides raising these factors, you must also consider issues that are more closely related to your personal decision-making capacity, and for which no banker can tender advice:
Be sure of the reasons for buying a house.
Ensure that the size of the house is right for you.
Choose the right time in the year to buy a house (there could be a particular time in the year when home prices drop, depending upon your location).
If you decide to involve a real estate agent in procuring your home mortgage quote, find the right estate agent and be aware of hisher commissions.
Select the location of the house carefully keeping in mind resale value.
Inspect the house thoroughly, identifying problem areas and factoring them into the price.
Getting a home mortgage rate that suits your requirement is one aspect, living with it is another. However, once you have understood the operating market forces in this arena, you will go a long way toward successful management of both these aspects.
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