You’ve set your budget and found your dream home. The next step in most cases is to apply for a mortgage. Even if the process is much easier nowadays thanks to online mortgage applications, it can still be a nerve-wracking process for first-time home buyers. After all, there’s a big decision to be made about your future home and it’s in someone else’s hands.
However, you can make the process slightly simpler by getting your financial records in order before you apply, and saving up for your deposit. If you can show lenders a history of responsible borrowing, your chances of approval are guaranteed to be higher — and your anxiety levels lower.
You don't need to have a fully approved mortgage in place to begin your search. It's possible to request an Approval in Principle (AIP) from a mortgage lender first. Think of it as a written confirmation that, based on initial checks, the lender is prepared to give you a certain amount.
You can show an AIP letter to a seller as proof that you are serious about a purchase and financially ready based on initial evidence. It doesn't guarantee, however, that you will be approved for a full mortgage. Before making a formal offer, the lender will need to make more rigorous checks that may uncover financial issues.
There are some factors that mortgage lenders take into account that you can’t control. For example, the overall economic outlook in terms of interest rates, unemployment, and inflation will all influence the level of risk that lenders will take.
These factors aside, lenders decide on a case-by-case basis. According to Business World, one in three borrowers in Ireland are refused a loan at some point, so don't take it personally or lose hope if it happens. Typically, they will reject applications due to the following reasons:
Your lender will pull your credit report from the Central Credit Register after you've applied for a mortgage. Lenders want to see a consistent borrowing and repayment history.
Ironically, that means you can find yourself penalised if you have no history of borrowing at all (a particular problem for young homebuyers). Other red flags include late payments or county court judgments on your report.
You can request your own credit report for free from the Central Credit Register, but this will not show your credit score (which is available to lenders). Scores in Ireland range from a minimum of 224 (very high risk) to 581 (low risk).
It’s necessary for you to remember that your credit score is just one of the factors lenders evaluate, so a good or bad score alone will not secure or rule out a loan.
While it’s OK to use any free tools lenders provide for evaluating your eligibility for a loan, you should avoid formally applying for more than one loan at a time. That’s because each credit application you make that involves a ‘hard search’ temporarily lowers your credit score.
Your debt-to-income ratio (DTI) will reflect your ability to meet mortgage repayments. If you have too much existing debt, lenders may be wary. However, it's worth noting that Ireland is one of the few countries in the European Union to favour Loan-to-Value (capped at X3.5 income) over DTI as a measure of eligibility. Critics have pointed out that this penalises first-time buyers since it sets a maximum mortgage value based on current salary, rather than taking existing debts into account.
Each mortgage lender sets its own criteria, but the most you can borrow as a first-time buyer is up to 4 times your gross annual income. This figure will vary depending on the size of your deposit and your current monthly debt repayments.
Most lenders provide free tools for you to establish your borrowing budget before you start house hunting.
It can be difficult to obtain mortgage approval if you don’t have a regular monthly income, and that applies to the self-employed or contractors too.
If you are not in full-time employment, you may have to seek out a lender who specialises in mortgages for your circumstances.
Since the 2008 financial crisis, 100% mortgages (no deposit required) are no longer available in Ireland. Typically, you’ll need to save up to 10% of the mortgage value as a first-time buyer or 20% if you’ve already owned a property.
Of course, this means that you need to keep a close eye on your spending and expenses. The more you can put down as a deposit, the less you will have to pay in interest over the mortgage term.
If you want to follow in the footsteps of the 53,335 homebuyers who had their mortgage applications approved in Ireland in 2021, the secret is to get together your paperwork and check your own eligibility before you start contacting lenders. By doing the following, you can make your application look far more attractive to your lender:
Save for a deposit
Prices vary enormously across counties, but according to the CSO the average house price in Ireland at the start of 2023 was €305,000. That would require a deposit of just over €30k for a first-time buyer, whereas one-bedroom or studio properties will be a lot more affordable (especially outside the main cities).
Clean up your credit report
If you're not familiar with your credit report, now is the time to have a look at it. Check for errors first, such as:
Make sure that you provide the latest and most accurate information.
Work on your credit score
There are no quick fixes, but you can gradually improve your credit score with these strategies:
Add your name to the voters' list: By including your name in the Register of Electors, you will benefit your credit score.
Review your income options
However often you’ve heard that you could buy a house if you’d just give up the takeaway coffees, the likelihood is that it’s an income boost you’ll need.
If your income is irregular or non-permanent, make sure your self-assessment tax declarations are accurate and up to date so that there’s a history (ideally going back two years or more) of your earnings. Another common solution is to combine your income with a partner to apply for a mortgage based on a joint income declaration.
For more resources on the homebuying process check out our content hub here.