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- A significant 31% of property deals fall through due to buyers’ lack of understanding of the purchasing process. Understanding the process is crucial to ensure smooth transactions.
- To secure a buy-to-let mortgage, one needs a 25% deposit, rental coverage of at least 125%, existing property ownership, an annual income of at least £25,000, and a good credit history.
- After securing a mortgage in principle, the steps include hiring a solicitor, connecting the lender with the solicitor, reviewing the memorandum of sale, assessing the draft contract, making necessary inquiries, and managing property surveys and valuations.
It’s no surprise that 31% of property deals fail – the vast majority of purchasers have no concept of how the house buying process works and how incredibly stressful it can become. Whether you’re thinking about buying a residential or investment property, you should have a thorough grasp of the procedure since sellers and real estate agents alike will not appreciate being messed around by potential buyers who clearly have no idea what they’re doing. Luckily for you, that’s exactly what we’re going to discuss in this house-buying guide.
Before we get started with this step-by-step house buying guide, we’ll first have a look at what is required from you if you wish to purchase a property with a mortgage.
What’s Needed When Buying An Investment Property?
When buying an investment property, you will need to have a method of funding the purchase. If you prefer to use cash, by all means, go ahead. However, if you prefer to utilise buy-to-let mortgages in order to leverage your property investment, there are some requirements you must meet first. These requirements are somewhat different depending on whether you’re buying an investment property or a residential one but we’ll address those differences when they come up. Here is what you’ll require to get a mortgage:
1. Deposit
You obviously need to have the deposit for the mortgage. Buy-to-let mortgages require a 25% deposit whereas residential mortgages may only require 5-10%.
2. Rental Coverage (Investment Property Only)
This refers to how many times your property’s rental income can cover the interest-only mortgage payments at an inflated right (often 3-4% above the current rate). Most lenders will require a rental coverage of at least 125% but this can rise to 150% for other lenders.
For example, if your mortgage payments are £500 per month at 7%, you will need to charge a minimum of £625 per month in rent to meet the 125% rental coverage criteria, or £750 for 150%. This should be a relatively easy requirement to meet as rent will often be much higher than this.
If you want an easier way to work out rental coverage, I recommend using this calculator.
3. You Should Already Own A Property
The majority of lenders will want to see that you already own a property. This shows them that you already know how the property purchasing process works and that you are in a fairly stable situation.
4. Earn At Least £25,000
Whilst this isn’t a requirement to purchase a buy-to-let property, most lenders will want you to earn at least £25,000 per year. This goes hand in hand with them wanting you to already own property – this is because the majority of mortgage products become available to you once you earn a wage of £25,000. This also tells the lenders that you will be able to support yourself and continue paying the mortgage payments if your property is ever empty.
5. A good credit score
A credit score isn’t actually something that lenders look at, it’s purely just a representation of what your credit history looks like. Lenders want you to have a good credit history so they can trust you with taking a loan out. If you have a good credit score, you’ll have a good credit history so this shouldn’t be an issue. If you’re unsure about your credit score, check it on Experian.
The Key to Successful Investments
The Step-By-Step Process Of Buying A House
The process of buying a house is very complex and a lot of things are all happening at once but I’ve tried to lay things out in linear order the best I could. However, it’s worth noting that many of these steps may not happen in this exact order.
Assuming that you have got a mortgage in principle and your offer has been accepted, these are the next steps for buying a house:
1. Find a solicitor and get the ball rolling
Find a solicitor, instruct them and provide them with funds for searches (this will usually cost a few hundred pounds). They will send you some paperwork for you to fill out, do it promptly and send it back to them first class. You don’t want to skimp out at this stage, speed is of the essence.
2. Introduce your lender to your solicitor
You need to introduce your mortgage broker (a.k.a mortgage lender) to your solicitor if you are buying the property via a mortgage. Your solicitor will communicate with your lender throughout this entire process.
3. A memorandum of sale is issued
At this point, the estate agent will send you a ‘memorandum of sale’ – this sounds confusing but it’s not, it’s a simple document written by the estate agent which confirms the essential details of the sale – information such as the agreed price, the vendors information, whether the property is leasehold or freehold and any special conditions of the sale.
4. A draft contract will be sent
The seller’s solicitor will then send a draft contract to your solicitor – this will include all the information about the property.
5. Your solicitor will begin to raise enquires
Now that your solicitor has the contract, they can begin to raise enquires (this is just fancy talk for asking questions about the property and the contract). This stage tends to take a while because solicitors are often slow at getting back to each other and there are many enquiries to make.
6. Your solicitor will perform local searches
Whilst this is going on, your solicitor will perform local searches – this is simply checking the surrounding areas out for anything which may affect the property in the future; such as:
- Local planning
- Flood risks
- Contamination
- The presence of mines
- The property being built over a coal mine
7. Check what the redemption figure is
It’s a good idea to check in with your solicitor here and ask them if they have got an answer back to the ‘redemption figure’ – this is the amount of money the current owner will need to pay their lender for redeeming their mortgage early.
8. If leasehold, your solicitor will enquire about the lease information
If the property you are buying is leasehold, your solicitor will also request documents from the freeholder. They will want to know more about the lease, how long is left, whether there’s a ground rent and service charge (if so, how much are they and if they’re increasing) and whether there are any weird conditions with the leasehold.
9. Independent survey
If you wish to have an independent survey done on the property, this is the time to do it. We’d recommend the RICs level 2 homebuyer survey – this checks for any structural issues as well as drainage, heating and dampness in the property.
10. Your lender will instruct a surveyor to value your property
At this point, your mortgage lender will instruct a surveyor to go around to value the property. The lender needs to make sure that the property is worth what you are paying for it.
This is where down-valuations pose a risk to your property purchase. Down valuations are when the valuer lowballs you – they don’t think that the property is worth what you are paying for it. If you are unfortunate and your lender down-values your property, you may need to find another lender or revise your offer and hope that the seller will agree to it. Another option is to increase your deposit to cover the cost of the devaluation – this should be your last resort.
11. Mortgage offer
The mortgage offer may come in at any point. Once it does, sign the offer and send your deposit to your solicitor. This is a good time is also send your solicitor the cash necessary for paying the stamp duty.
12. Sign contracts and exchange
Assuming that all of the above has gone to plan and no complexities have drawn the process out, you and the seller will sign contracts and agree on dates to exchange the contracts. This will usually be the same day but it’s necessary to distinguish between these two events because they mean different things according to UK law.
13. Collect your keys
After you exchange the contracts, you will be the new homeowner and can collect your keys.
14. Register your title
Before you can enjoy your new property, it’s important that you have your solicitor register your title with the land registry within a week of exchanging the property.
The entire process will usually take around 8 to 12 weeks depending on how fast you, the vendor and both solicitors move. It may take even longer if there are any complexities, if there’s a chain involved (when one seller needs to sell their house in order to buy another) or if you’re just incredibly unlucky.
Tips For Buying an Investment Property
When it comes to buying your first investment property, a few key tips can make the process smoother and help you avoid potential pitfalls.
- First and foremost, research is your best friend. Take the time to thoroughly analyse the property and its location. Look for any red flags or potential issues that could impact your investment down the line. By doing your due diligence upfront, you can mitigate risks and make a more informed decision.
- Another important step is to utilise the expertise of a buy to let mortgage broker. They can guide you through the process of finding the best mortgage product available to suit your needs. A mortgage broker has access to a wide range of lenders and can help you secure favourable terms and rates, saving you both time and money.
- Streamline the buying process by being organised and having all your documents ready to go. This includes financial records, proof of income, identification, and any other relevant paperwork. Being prepared ensures that you can move quickly when the right opportunity arises, preventing delays that could cost you the property.
- When venturing into buying an investment property, it’s crucial to keep in mind that not every transaction goes as planned. In fact, it’s estimated that around one-third of all property sales do fall through. This statistic may initially seem disheartening, but it’s important not to let it discourage you. Property transactions can encounter various hurdles, such as issues with financing, legal complications, or unexpected discoveries during surveys. While it’s impossible to eliminate all risks, conducting thorough research, seeking professional guidance, and staying organised can significantly increase your chances of success.
Remember, buying an investment property is an exciting journey, but it’s important to approach it with care and diligence. Research, utilise the expertise of professionals, and stay organised to set yourself up for success. With these tips in mind, you’ll be well-prepared to navigate the buying process and embark on your investment property journey.
Final Thoughts
After reading this guide on how to purchase a house, you should have a very good idea of what the process looks like after you have your offer accepted. If it seems like a daunting process, that’s because it is – buying a house is often referred to as one of the most stressful things a person can do. However, it’s also one of the most rewarding things a person can do. Especially if you are purchasing an investment property – one which rewards you very handsomely each month.
Victor Sterling
Hi, my name’s Victor - I’ve been investing in property for three years now, with my preferred strategies being buy-to-let, BRR and house flips. My goal with Amateur Landlord is simple - to provide beginners with easy-to-follow resources that simply weren’t around when I started, and to offer these for free and without ads.