First Time Buyer - Mortgage Ready

Purchasing your first home is a major milestone in life, but for those unfamiliar with the mortgage approval process, it can appear daunting

Purchasing your first home is a major milestone in life, but for those unfamiliar with the mortgage approval process, it can appear daunting. A first-time buyer is a borrower to whom no housing loan has ever before been advanced in Ireland or around the world.

What You Need To Know

Start at the end and work back. Where do you want to live? Explore your target areas, ask existing residents about the area, and see what size properties are available within your price range. If possible, rent in the area before buying. Many want to live close to family, friends, and work, but as property prices are higher the more central you go, this may not be practical given the size of the property you can afford. You will need to balance your ideal location with your ideal home based on your future plans. Some will be fortunate enough to start at the finish line securing their forever home, whereas others will use their first home as a stepping stone to their forever home.

First time buyers require a 10% deposit of the purchase price and can borrow up to 4 times their annual income before tax. Each calendar year, banks are allowed to increase their lending above the 4 times limit to 15% of their first-time buyer lending book. These exceptions are replenished each calendar year and are usually in short supply come the summer months.

The government supports in the form of Help To Buy, which is a refund of your income tax for the previous four years up to a maximum of €30,000 to help with your mortgage deposit. This scheme is currently scheduled to run to the 31st of December 2024, and covers newly built houses, apartments, or self-builds. The value of the property cannot exceed €500,000.

Local Authority Home Loan is a government-backed mortgage for first time buyers. You can borrow up to 90% of the value of a new or second-hand property, up to certain maximums depending on where you wish to buy in Ireland. You must have an income of €75,000 or less as a single applicant, or a combined income of €85,000 as joint applicants.

If there is a difference between what you can borrow and the purchase price, this gap will need to be bridged by boosting your income, selling an asset, or receiving a gift or a windfall. If this gap cannot be bridged, you will need to lower your expectations to what you can afford.

While the mortgage and deposit are the significant pieces of the home buying puzzle, there are additional costs which are all too often overlooked- legal fees, chartered surveyor/structural engineer fee, moving costs, mortgage protection insurance (bank requirement), home insurance, stamp duty and local property tax. This excludes repairs, fit out and kit out costs, but it’s not unusual to prioritize the bare necessities first, building into your home over the first couple of years. It’s important to be cognizant of the long-term commitment to repaying your mortgage, as well as the cost of running and maintaining your new home into the future.

When dealing with such large sums of money it is easy to get carried away, but you don’t want to be “house poor." House poor is when a large portion of your after-tax income is committed to repaying your mortgage. It is also natural to assume your current circumstances will remain unchanged into the future. Job loss, ill health, serious illness, injury, or death while not probable, are possible.

What you need to do

One of the most important factors for a bank when evaluating your mortgage application is clear transactional evidence of your ability to pay your monthly mortgage payment. You can demonstrate your ability to repay through rent, savings, repayment of non-mortgage debts, or a combination of all three. Secure, permanent employment is also a prerequisite of your ability to repay. Think of a mortgage application the same way as a job interview. Do your homework, present your track record clearly and concisely, which will make it easy for the bank to say yes.

Keep your bank accounts to a minimum. Request a credit report from the central credit register to ensure a clean credit history. Unpaid or late direct debits, standing orders or credit card repayments will be flagged. Overdrafts and any non-mortgage debt will reduce your borrowing capacity and therefore need to be cleared prior to applying for mortgage approval. Gambling is a red flag. The bank will likely query cash withdrawals, inconsistent savings, and any non-salary income. Employee pension contributions may reduce borrowing capacity too.

For the mortgage application itself you will need to provide:

  • Valid Government ID
  • Proof of address
  • Proof of PPSN
  • Payslips
  • Salary certificate
  • Employment detail summary
  • Current, credit, loan, and savings account details for up to 12 months initially

You can go to a broker or a bank. The main focus is to find the lowest interest rate available on the open market. Avoid short-term incentives over long term benefits. It is not uncommon for first-time buyers to fix their interest rate for the first five years to ensure repayment and aid in cash flow planning. Approval in principle is only as good as the level of detail the mortgage provider has requested for review. The more in-depth the review process, the stronger approval in principle will be.

When bidding for properties, know your limit and when to walk away. Research the properties already sold in the area. Buyers and sellers reneging on agreements is commonplace so it’s important not to build up your expectations during the offer stage. Know if the seller needs to sell their home before you can move in (property chain). Timelines related to buying and selling property rarely go to plan. It can be an incredibly frustrating emotional roller coaster, but hopefully worth it in the end.

As buying a home is a rare life event, approach it with the mentality of measuring twice and cutting once. Upon becoming a homeowner, pay attention to the switcher market and the potential for a better interest rate with an alternate provider.

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