It may once have been the case that you found your home first, and then made an appointment to apply for a mortgage. These days, however, if you’re not mortgage-ready you may be wasting your time searching for a new home.
Indeed, ahead of a launch at Graydon in Newcastle earlier this month, Colm Byrne, a director at Sherry FitzGerald New Homes, noted that “it would be quite surprising to see someone turn up tomorrow morning that isn’t loan approved”.
So if you don’t want to start off your search for a home on the back foot, what do you need to do to make sure you’re mortgage-ready?
Approval in principle
First you need to work out how much you can borrow. Michael Dowling, of Dowling Financial, says that most people will use an online calculator to come up with their total based on the Central Bank’s lending rules (see below).
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However, he cautions against inputting payments in addition to your basic income unless you have a steady history of these. “If you get overtime, bonus or commission, lenders will take this into consideration but they will want to see two years or three years’ evidence,” he advises.
Some people will qualify for more than the typical 3.5 times income, but they tend to be on higher incomes. As a rule of thumb, Dowling suggests single applicants would typically need a basic salary of €60,000, while a couple would need combined income of €80,000 “to get them on the pitch, in terms of being considered for an exception”.
Showing evidence of savings and/or rent payments is also important. While personal debt – such as a car loan or credit card – doesn’t have to be a deal breaker, Dowling says that if you can pay these off, you may be able to qualify for a bigger mortgage.
However, childcare costs may be impossible to reduce, and these can have a significant impact on repayment capacity; that in turn will reduce how much you might be able to borrow.
And remember, don’t apply for a mortgage if you have unpaid items or referral fees on your current account; Dowling says wait for six months and then apply, as these will really go against your application.
What estate agents expect
Once you’ve gone through the paperwork and have your approval in principle (AIP) from a lender, you will be in a position to reserve a new home by being able to show “proof of funds”, via your AIP letter, to the selling agent.
But should you redact the exact amount first? Byrne says estate agents do need to see this figure to take your booking – but no record of these letters/financial details are kept: simply showing the documents to an agent is enough.
If you’re a cash buyer, you will also need to show proof of funds – according to Byrne, a letter from your solicitor confirming you have the funds to complete the sale, or sight of a bank statement showing the funds are in place, will suffice.
If you don’t have this letter, you will find yourself at a disadvantage given that many properties will be reserved in the days around the launch.
“[Developers] want people who are ready to sign the contract, once it’s issued, within 28 days,” says Gina Kennedy, director of new homes with DNG. “So if you’re only getting mortgage approval (at the time of a launch) you may miss the boat,” she says, urging people to “get organised”.
Ideally, new-homes agents say you should also have your solicitor’s details to hand, as well as Help-to-Buy approval, if you qualify for it or are availing of it.
Remember, even if you qualify for Help-to-Buy you will still need cash to make a booking deposit – typically about €3,000-€5,000 – so will need some of the funds upfront to pay for this. “That’s essentially part of their cash deposit,” says Byrne.
Bump up that mortgage
Availing of Help-to-Buy (remember, it’s due to expire at the end of this year, but is likely to be extended in September’s budget) may allow you to increase your budget.
Of course, this will depend on your level of savings. If, for example, you’ve saved €40,000 towards a deposit, and then find you’ll need only €10,000 as you qualify for the maximum tax rebate of €30,000 under Help to Buy, you can put your €30,000 towards the purchase price of your home.
If you’re applying for shared equity, or the First Home scheme, which will see the State take an equity share, of up to 30 per cent, in the purchase of a new home up to a value of about €450,000 (different price limits apply across the country), your budget will also increase accordingly.
So, for example, a buyer with a mortgage of €280,000 would be able to afford a new home valued at €311,000 – but if they applied for the First Home scheme, they could buy a home being sold for €440,000 (mortgage of €280,000 plus Government stake of €120,000 plus deposit of €40,000).
As with your AIP letter and Help-to-Buy information, Kennedy also suggests people get an eligibility certificate for this scheme to bring to a new homes launch. This gives you an estimate of how much equity you can get from the scheme.
Remember, if you’re also availing of Help-to-Buy, then the most you can benefit from under First Home is 20 per cent of the cost of the new home. “Probably what you’ll see is that people use 10 per cent Help to Buy and 20 per cent First Home,” says Byrne of the new scheme.
Finally, bear in mind that buying a home is only the first of the costs you’ll encounter. First-time buyers must also remember there are “solicitor’s fees, stamp duty, insurance, valuation fees, surveyor’s fees and also the costs to furnish the property”, cautions Kennedy.
The mortgage rules: What you need to know
- The Central Bank’s mortgage lending rules now govern all lending agreements.
- These rules mean that most first-time buyers (FTBs) can borrow 90 per cent of the purchase price of a home, while most second and subsequent buyers (SSBs) can borrow 80 per cent of the purchase price. This means you’re likely to need to be able to fund 10 or 20 per cent of the purchase price yourself – although Help-to-Buy may help with this for FTBs.
- When it comes to the amount you can borrow, the mortgage rules dictate that you can borrow only 3.5 times your income.
- Now there are exemptions. Firstly, when it comes to the deposit, the Central Bank does allow lenders loan 5 per cent of FTBs more than 90 per cent of the purchase price, and 20 per cent of SSBs more than 80 per cent.
- And one-fifth of FTBs, and 10 per cent of SSBs, will be able to borrow up to five times their income, should they qualify for an exemption.
- Qualifying for an exemption is not always easy, however, and they are not always that common. Figures from the Central Bank, for example, show that in 2021 just six FTBS (950 SSBs) borrowed more than 90 per cent of the purchase price, while 2,468 (549 SSBs) borrowed more than 3.5 times their income.
- In short then, if you’re a FTB and your single/joint income is €80,000, you will be able to borrow €280,000, which, with a deposit of about €31,000, will fund a home being sold for about €311,000. If you qualify for an exemption of 4.5 times income, your purchase power will shoot up to €400,000.
