The Mortgage Process
Gerry Fitzgerald has built a multi-million pound property portfolio which he manages himself. As a former Independent Financial Adviser he is further qualified to offer insight and guidance on the buy-to-let mortgage market. With long experience, both of using letting agents and of managing properties himself, he can speak with authority on the benefits and pitfalls of both approaches. He also runs a successful holiday letting business.
While a full application for a mortgage can be made at the outset, there is merit in applying for a decision in principle instead. This has the advantage of time saving if the lender will not entertain the loan under any circumstances.
DECISION IN PRINCIPLE (DIP)
Most lenders offer this service. A faxed form containing the following details is all that is required at this stage:
- name and address
- price of property
- mortgage required
- estimated rent from the property.
Armed with this information, a lender can decide if your case meets their lending criteria. They will also conduct a credit check with a credit agency to ensure that your credit history is satisfactory. A decision in 24 hours is normal.
Note, however, that if the lender agrees in principle to lend you the money, they are not in any way committed to doing so. They can change their mind for any number of reasons – from the details on the full application form to the results of the survey (see below).
The internet has made it possible to go directly to a lender and obtain a DIP online, in a matter of minutes. While this is very convenient, it can encourage the potential borrower to obtain decisions in principle from a number of lenders in quick succession. This can prove disastrous! For, each time a DIP is requested, the lender does a credit check (see below) and leaves a footprint on the applicant’s credit file. Even if the results of the credit check are perfect, the fact that an inquiry has been made is added to the credit file and is seen by the next lender. Too many such inquiries and lenders start to turn down applications. The assumption is there must be something wrong if you are applying to so many lenders!
There are two credit agencies that hold details of your credit history – Equifax and Experian. Lenders will consult one or both of these for every mortgage application or DIP. Apart from basic details of name, address and date of birth, the credit file they obtain will provide the following information:
- Credit cards held and current balances.
- Payment history on credit cards for the last 12 months.
- Agreed limit on credit cards.
- Personal loans and history of payments.
- Mortgages held and history of payments.
- History of defaults on loans, mortgages or credit cards.
- History of late payments on loans, mortgages or credit cards.
- Whether a property has been repossessed or voluntarily given up.
- Suspected fraud at that address (e.g. fraudulent mortgage application or false identity fraud in credit card application).
- County court judgments (CCJs).
It is clear from the above that there is little about your financial history a lender will not know! If your history is less than perfect, it does not mean you will fail to get a mortgage. You may, however, have to try another lender.
Occasionally you will encounter a problem unexpectedly and for which the lender offers no explanation that makes sense. This can be due to incorrect information on your file. You should contact both Experian and Equifax (see ‘Useful addresses’) and obtain a copy of your file (the cost is nominal).
If there is incorrect information there you can arrange to have it removed. If the information is correct but you have an explanation or you think the information is misleading you can add your own comment in the appropriate place. This is called a notice of correction. The notice should not be more than 200 words and you can take advice on the wording from a solicitor, Consumer Advice Centre or Citizens’ Advice Bureau. Your comments, however, should be neutral in tone. If it is a foul-mouthed attack on the lender or credit card company, it won’t be published!
Not to be confused with a credit check, this awards marks out of ten on the basis of the lender’s (usually secret) criteria. In addition to the credit check information, it will take such matters into account as age, sex, employment status, marital status, time with your bank, etc. The resulting score tells the lender whether you are the kind of customer they would like to have. Only a few lenders still bother with a credit score.
If you are dealing with a broker you should be given an illustration before you complete a mortgage application form. If you are applying directly to the lender you should receive an illustration by return post. As a buy-to-let (BTL) mortgage is not a regulated product, however (see Chapter 9), you may not receive a full key features illustration (KFI). This largely depends on the lender from whom the illustration is obtained. Whichever version you receive you should note carefully the following details:
- Arrangement fees, valuation fees, any booking fees, higher lending fees and fees paid by the lender to the broker are set out clearly in cash terms. Also included will be any fee you have agreed to pay the broker yourself. If you receive an old-style illustration (as opposed to a full KFI), the lender’s fee to the broker will be referred to but not detailed and any fee you pay to the broker will not even be referred to.
- Naturally you will expect to find the interest rate in the illustration but you will also find the term of any lower initial rate and the rate it will revert to when the term ends.
- The initial monthly cost will be stated plus the monthly cost after any initial lower-rate ends.
- With any special deal (such as an initial discounted rate) the penalty for redeeming the mortgage (or part thereof) during this time will be set out in cash terms (the full KFI) or as a percentage of the amount redeemed (old-style illustration).
- You will be reminded of which repayment method – capital and interest or interest only – you have chosen.
- Also provided is a table of monthly costs for each month over the entire mortgage plus the total cost (i.e. the capital plus interest paid).
At this point a full application form will be completed. This is considerably more searching than the DIP form and asks for more detailed information. In the case of addresses, for example, most lenders look for a three-year history and will want all addresses relevant for that period. If there is a gap they can’t account for, they may assume you have been in prison and turn you down!
In the case of self-employed applicants, a few lenders may ask, at this point, for details of an accountant or book-keeper. In the absence of one they may require proof that tax returns have been submitted. This is rare for BTL lenders but it can arise. If it is likely to be a problem, a good broker will steer you well clear of such lenders.
It is increasingly common for applications to be made online, whether the application is made direct to the lender or through a broker. This has the obvious advantage of speed but does not entirely remove the need for paperwork. Some lenders may require certified copies of money-laundering requirements (see below) or original signatures on a direct debit form. If so, these will have to follow by post.
It is a mystery how anyone could launder money by borrowing it! Lenders, however, must act as if it is a daily occurrence. Accordingly, you will need to produce proof of ID (a passport) and proof of address (recent utility bill, bank statement, mortgage statement or council tax bill). Original documents in all cases.
The valuation fee, payable to the lender (by cheque or credit card), will be sent in with the application form. This fee will be refunded if, for any reason, the valuation does not take place. However, once the valuer has done his job there can be no refund of his fee, even if the mortgage is subsequently declined.
As for the valuation itself, the borrower has a choice. He can opt for a simple valuation, a homebuyer’s report or a full structural survey.
The valuation, the cheapest option (and chosen by most BTL borrowers) is just that – a valuation. The purpose of the report is to check that the property is worth the price to be paid for it. Only obvious defects, such as subsidence, structural problems or essential repairs, will be noted.
The homebuyer’s report is more expensive and this is as much for the benefit of the borrower as the lender. The report will be considerably more detailed than a simple valuation and will highlight such matters as poor window frames, peeling paintwork, etc.
The full structural is the most thorough and most expensive of all. This will cover everything from the state of the roof timbers to the condition of the floor under the carpets.
THE UNDERWRITING PROCESS
Once the underwriter has received all the paperwork, he will assess the case in detail. If a decision in principle has already been made, the underwriter will compare the information on the DIP form with that on the more detailed application form. Any discrepancy here could give rise to concern and a request for clarification. If the underwriter is unhappy, he could decline the application and halt the process here. If all is well, he will instruct a valuer. When the valuation report is back, the underwriter will assess its contents. If he is happy with that, he will proceed to the offer stage.
This is crucial. In the case of a BTL mortgage, the valuer has to provide the lender with two pieces of information – the value he puts on the property and his assessment of the rent it would fetch.
From the borrower’s point of view, both figures have to be right! As far as the price is concerned, this naturally has to correspond to the value of the property as set by the valuer. In a stable or rising market this is normally not a problem. The valuer will set a value at the price offered, though never higher! In a volatile or falling market, however, the valuer may come in at a fractionally lower level (e.g. 5% lower) in order to cover himself against future falls in the market. In this case the wisest course of action is to provide the vendor with the valuer’s figures and renegotiate the price. A sensible vendor will reduce the price to the valuer’s figure. After all, if the vendor starts again with a new purchaser, he is likely to face the same problem (and quite possibly the same valuer!).
In the case of the rent assessment, the situation is altogether different. Most valuers have no idea how to assess the rental figure for any given property. Because the BTL market is relatively young, many valuers have little or no experience of setting rental values. In some cases they will check with local letting agents and settle on a figure slightly lower than the average (to be on the safe side!). Others will ask the selling agent what they think it will fetch. If the property is already let, the valuer will want to know the rent. In all cases two points are worth noting:
- Always tell the valuer (directly or through the selling agent) what rent you believe can be achieved. Never forget to do this. In many cases he will accept your figures.
- If the rental figure in the report is lower than you need, always appeal. Even a slight reduction in the monthly rental figure needed for the mortgage could make the purchase impossible. An appeal is always worth making.
To appeal a rental valuation, you will need to contact at least two local letting agents and ask for a rental assessment on their company letterheads (there will normally be little trouble obtaining these as local agents will hope to do business with you in the future). In addition to the rental assessments, however, the agents will need to state in writing that they currently receive a similar rent for a similar property in the same area. A valuer might well ask for such details. Without them, the valuer may ignore the agents’ assessments altogether. Armed with appropriate and detailed evidence, however, most valuers will change their minds and adjust their figures.
This is what everyone is waiting for. The lender sends out a formal offer letter to the borrower, with a copy to his solicitor.
A cursory glance at any offer letter reveals the one-sided nature of the document. Apart from the basic details of the loan amount, interest rate, repayment term, redemption penalties, etc., it is all about the lender’s rights and the borrower’s responsibilities! A typical offer will cover the following:
- The right of the lender to withdraw the offer at any time before completion.
- The lender’s right to repossess if certain conditions are not met.
- The responsibility of the borrower to insure the building, keep it in a reasonable state, pay all local taxes, pay any ground rent or service charges.
In addition, the special nature of a BTL mortgage will require the inclusion of further conditions and duties specific to the rental aspect of the transaction. The following could reasonably be expected in a BTL offer letter:
- The requirement that the property be let within a specified term of the loan release – typically, three months.
- The requirement that the property be let (i.e. not used by yourself) for the duration of the mortgage.
- If the property is already let, the tenancy agreement must be acceptable to the lender.
- Acceptable tenancies are assured shorthold tenancies of 6 or 12 months. No other kind can be used (unless the lender allows borrowers to let to local authorities or housing associations; see below).
- The exclusion of specific tenant groups such as students, housing associations or local authorities.
- Where these groups are not excluded, special conditions may be imposed. For example, when letting to local authorities or housing associations a maximum term of three years is commonly set. Because anything can happen in a three-year period, the lender will try to build in further protection for themselves. The offer letter may require, for example, that the borrower give irrevocable authority to the housing association or local authority to pay the rent directly to the lender if the lender asks him to do so. This covers the lender against the possibility that the borrower fails to make his mortgage payments but the lender can’t repossess until the three-year term is up. Lenders can take the rent in the meantime and repossess later. Lenders don’t miss a trick!
Before a lender will release mortgage funds, a suitable buildings insurance policy will have to be in place. The solicitor for the purchaser will need to provide the lender with details of the policy. Failure to do this can hold up the entire process.
Not only must a policy be in place, but it must also be the right policy. For a BTL lender only a BTL policy will do – a policy that specifically recognises that the property will be let and not owner occupied. An ordinary policy would provide no cover at all as the insurance company would simply refuse to meet a claim.
TRANSFER OF FUNDS
Once the borrower’s solicitor has satisfied the lender as to title and confirmed that buildings insurance is in place, funds can be transferred and the mortgage is complete.