27 January, 2021
First-time buyer guide #3: Understand the process
Buying your first home is an exciting time.
You've set your target and started saving up. How hard can it be?
The first steps into anything new are exciting, but the homebuying process can also be complicated and confusing. Let's break it down.
The homebuying process - an overview
Over a short Zoom meeting, Dan tells me that Art Brut once said “it’s a bit complicated”. ‘Who?” I replied. “You know, the art punk band, Art Brut?”.
It has been a few years but I don’t remember that particular album being about the homebuying process. Dan should also have known I'd be more likely to understand an Metallica or Iron Maiden reference.
Anyway. In some ways, buying a home is fairly simple - you find a property you like, agree a price with the seller, borrow some money, and then buy the home.
Well, not quite. Although the high level view seems simple, it becomes more complicated when you start getting into the details. So, while it's a good idea to get to grips with the process, we suggest you try not to get bogged down in minutiae before you even begin.
Knowledge is power, and it will help you to know what is meant to happen and when. It also doesn’t hurt to understand why each step is happening. Personally, I find it comforting to know where I am and where I'm going next.
So, the basics of the homebuying process look like this:
- Set your target and save up
- Get a mortgage in principle
- Find the right property
- Agree a purchase price
- Get a mortgage offer
- Instruct a solicitor
- Get a survey completed
- Exchange contracts
- Complete your purchase
Let’s look at each step in more detail.
Set your target and save up
Well, maybe not this one. We have already covered this in the previous article, and the next one will look at building up your savings.
Get a mortgage in principle
Let’s call it a MIP to save my typing fingers. A MIP is also sometimes called an ‘Agreement in Principle’. It’s a way to firm up your target amount, but it also shows sellers and estate agents that you’re serious.
A MIP is an indication of how much a lender could lend you, based on your income, spending, and debts.
MIPs don’t generally affect your credit score as lenders don't run a full credit check. That comes later. However, the lender is likely to ask credit reference agencies to confirm whether some of the details provided match your credit file.
The MIP doesn't guarantee that you can get a mortgage. It simply gives you an idea of whether that lender would be willing to lend the amount you need.
Timing a MIP can be crucial as I’ll try and explain below.
Firstly, you should be aware that if you've had some money problems in the past, your MIP might give you a figure notably lower than you’d hoped.
The major issues that may impact on what or if a lender will lend to you are:
- A bankruptcy order in the past 6 years
- A County Court Judgment (CCJ) in the past 6 years for debt that you haven't repaid
- Being refused for a mortgage or having a home repossessed in the past 6 years
- Less than 3 months' employment history
Secondly, if you already have debts then this may impact the amount that a lender may agree (in principle) to lend, even if you have every intention of clearing the debt. More details on that here.
If any of these apply to you, it may be prudent to hang fire before charging out to get a MIP. It may be helpful to wait until you have either cleared the debt or simply allowed more time to pass.
Don’t worry if you aren’t 100% certain on this, we’ll be doing a separate post on getting mortgage ready and we’ll cover this again.
Also, if any of the major issues above apply to you, I’d recommend you speak to an independent mortgage adviser before applying for a MIP as they will know what lenders are looking for and which ones you'd be better suited to.
Find the right property
Art Brut and now Voltaire? Pretty high brow stuff. Anyway, Voltaire is famous for saying “the perfect is the enemy of the good”.
Even with an unlimited budget, unless you design and build your own home, it will never be perfect. And most us are not working with an unlimited budget.
It is very important that you are able to separate your wants from your essentials, and your preferences from your deal-breakers.
What are you willing to compromise on?
Is location everything? Are you willing to lose a bedroom to stay in that area?
Just make sure that you are clear on what it is you want from a property.
Agree a purchase price
This can be tricky but you need to try and remain as stoic as you can.
Know what you can afford and do not go beyond that line. If you find a property you love, it can seem like the only one. But if it's outside your budget, take a deep breath and pass - and wait for one you can afford.
Home buying is emotional but don't forget the facts and figures of your financial situation.
Try and do some research into the housing market where and when you are buying. Are properties selling quickly or staying on the market for ages? Use this research to help you when you make an offer. More info on house price data here.
You can see sold prices on the Land Registry but be aware that only the most recent prices will be relevant.
Also, think about how your choice may lead to other costs. For example, you might pay more stamp duty on a more expensive property. If purchasing a new build or a ‘doer-upper’, you might need to spend extra on making it habitable. And if you're like me and paint like a 5 year old, then you'll need to pay a decorator too.
Get a mortgage offer
You’ve got the mortgage in principle, now it's time to turn that into a formal mortgage offer.
This is when you apply for a mortgage against the specific property you want to buy. The lender will check your income, credit history and financial circumstances, and consider whether you can afford the repayments now and in the future.
If you are applying via a mortgage adviser, they should explain the different mortgages available. The main types are:
- Fixed rate - an agreed fixed interest rate for an agreed period which is usually between 2 and 5 years
- Tracker - a mortgage that tracks an agreed rate (usually Bank of England Base Rate) plus an agreed additional amount e.g. Bank of England Base Rate + 1%
- Standard variable - the lender's standard mortgage rate which will change over time
- Discounted variable - The lender's standard variable rate, with an agreed percentage discount for an agreed period
Fixed, trackers and discounted variables usually have higher set up costs and longer exit penalties.
For many people, this is the scariest or most anxious part of the whole process and can lead to some sleepless nights until the offer has been made.
Even when the lender is happy that your personal finances stack up, it doesn’t end there. They then turn to the property itself to make sure they protect their investment.
The lender will obtain a valuation of the property to make sure its value is broadly in line with what you are paying for it. Remember, if you cannot make the repayments, they will try to get their money back by selling the property. They need to make sure they could get their money back if they had to repossess and sell the property.
Please be aware that a mortgage valuation is not a survey - it's compulsory and largely for the benefit of the lender. To understand more about the state of a property, you can order a more complex report. More on this in a bit.
At this point, you should also be considering life or critical illness insurance, which would pay off the mortgage in the event of your death or illness. It may even be a condition of the loan.
Instruct a solicitor
The mortgage offer has come through and the seller is happy. It’s time for the legal eagles to get involved
This is when it can feel like the process moves outside of your control and comes to a screeching halt. There are lots of other people involved who need to get many different things done, which means it rarely goes smoothly.
So what are the solicitors doing in all those hours you wait for them to reply to your emails? Well, they will:
- Complete all of the required legal paperwork needed to complete the transaction
- Request and check the required searches, typically Land Registry, local council, drainage, and environmental checks
- Draft contracts
- Exchange contracts
- Gather the funds from the various sources (e.g. you, the lender, ISA providers)
- Handle the exchange of the money
- Pay any stamp duty bills. Whilst technically you have 14 days after completion to pay the stamp duty to your solicitor, most solicitors require it to be paid to the solicitor before completion
- Register the property in your name with the Land Registry and register the mortgage lenders ‘first charge’* against the property
*A legal charge is used to secure the main mortgage. A lender with a first legal charge over a property has a first call on any funds available from the sale of the property.
If you are purchasing as a couple, it is worth deciding (or at least talking about) how the ownership of the property should be set up. This might seem simple but there are options here.
You can own a property as either ‘joint tenants’ or ‘tenants in common’.
As joint tenants:
- You have equal rights to the whole property
- The property automatically goes to the other owners if you die
- You cannot pass on your ownership of the property in your will
As tenants in common:
- You can own different shares of the property
- The property does not automatically go to the other owners if you die
- You can pass on your share of the property in your will
Get a survey completed
You won't usually need a survey if you're buying a new build, as the house is often still being built. However, I would still recommend a snagging report.
In all other cases, you should consider a more detailed survey report and there are two main options.
- Homebuyers report - This is usually suitable for conventional properties which are less than 50 years old.
- Full structural survey - This is usually used for older or quirkier residences. This survey is much more detailed but is often well worth the expense. It could find serious issues with the property or at least highlight issues that need fixing which may mean you need to renegotiate the purchase price.
Now you can relax, the property is going to be yours. This is when the sale becomes legally binding. The seller can not pull out. If you pull out, you can be sued by the seller for any losses.
This is also the painful moment when you have to pay your deposit, which is always a bit scary.
At this stage, you should look into insurance for your new property so that you have it in place when you have completed. Your mortgage lender will probably insist that you have buildings insurance in place at a minimum.
This is also the moment to sort out life or critical illness cover. If you are using a mortgage adviser, then can usually sort this for you.
Complete your purchase
You can complete on the same day that you exchange contracts, or leave a gap of a week or two. If you're buying a new build, you might need wait for the property to be finished.
You will agree a completion date with the seller. If the seller is also buying a new home, you can ended up with the dreaded "chain" where you all complete on the same day.
Once completed, you collect your keys (usually from the developer or estate agent) and can either move in or start doing any work or redecorating.
So, there it is, an overview of the homebuying process.
It can seem confusing, but take it one step at a time. Don’t worry too far in advance - just make sure you're clear on what you need to do next. For most people reading this, the next step is probably just to keep saving.
Over the coming weeks, we will go into further details regarding each of the steps.
If there is anything you want covered in detail, just get in touch and let us know at firstname.lastname@example.org.
Adviser top picks
- Get to grips with the high level process - but don't worry about the details.
- A mortgage in principle doesn't guarantee you can get a mortgage. It gives you an idea of how much a lender might be willing to lend you.
- "The perfect is the enemy of the good” and I can almost guarantee that when looking for a home, you will have to compromise on something.
- Buying as a couple? Agree the legal basis of how you are going to own it.
- Don’t forget to protect yourself! This could be life insurance or illness cover, but will definitely include home insurance.