What is the best shape for your finances to be in to buy a house?

[Yoyooo]

My husband and I are looking to buy our first property in April, so looking to tidy up for accounts etc ready to apply for a mortgage.

We have 3 credit cards between us (one with £5k, one with 2.6k and one with £500 limit) but have them all empty apart from £2k on the £2.6k one.

We have a car finance loan - £8k left on a £14k loan.

We have a next store account open but no money on it and no other loans.

We will by April have £20k deposit.

We have no issues on our credit report apart from it wrongly saying we are not on the electoral register which we are correcting.

What is the best thing to do with our finances? Is it best to keep open the credit card accounts which aren't used or to close them down? Should we off the £2k balance fully or use that money to have more money in our account when we apply? Does a little credit card debt help with showing we are responsible lenders or is £0 best?

I am employed full time on £33.5k (in job for 4.5 years) and my husband is self employed with 6 years of SE records at average £22k and also a PAYE part time job at around £6k per year.

I'd be wanting to pay off as much of the outstanding debts as I could before taking out a mortgage (unless the car loan s very low interest and you consider it just another regular bill).

Evidence of responsible borrowing is good - but you can achieve this by using a credit card regularly (say to buy your weekly shop) and paying it off each month. If you're not using a credit card I don't think it matters whether you close it or not, but the £500 limit one is so small (in the scheme of things) that you might as well close it. Would suggest having access to 1 each in case of emergencies though.

We certainly consider the car finance a bill rather than debt. We are almost half way through our finance plan (5 years) and pay £240 monthly with low interest.

Close all but one of your CCs (the one with the lowest APR, use that one and pay it off in full each for food shopping or similar.

How much are you looking to borrow?

We are looking to borrow around £270k hopefully.

I think your biggest challenge will be deposit in that case. It sounds like you’re doing all the right things but anything >90% LTV is still tricky to get and will cost you more in interest. Ideally you need money for legal fees, plus any stamp duty depending where you are then 10% deposit on top.

This will be our first property so no stamp duty. What do you think we will need pit aside for fees?

I’d budget around £2k

My credit score app has 'credit utilisation' as one of the metrics for the overall score e.g. if I have £1000 total credit available and have used £800, then my utilisation is high (80%) and this negatively impacts my score. I don't know if this principle applies in general for credit rating, if so it may be worth keeping any 'empty' credit cards open.

Close down all the credit cards and store cards that you’re not using. Reduce the limit on any card you do keep. May down the credit card debt as much as possible.

I’m not in the UK so not hugely familiar with lending terms but wouldn’t have thought that £20k deposit on a £290k house purchase (so

I would pay off the credit card as lenders have different ways of knocking that off your affordability based on the outstanding balance.

With the car loan, its unlikely you will pay it all off so I would leave as it is as all that will happen is they will take your monthly payment into account in their assessment, not normally the total balance.

We probably couldn't up the deposit, but we may have to look at a cheaper property. Unfortunately as with a lot of places we have seen huge price increases in property in the past 6 months.

Speak to a mortgage broker. We are currently house hunting and have a AIP with 10% deposit and higher debt than you. The debt in itself isn't an issue as long as its well managed but does impact affordability.

We have joint income £70k
£4k on a credit card
£3k on store account
£6k car finance
One car on PCP with two years left
One dependant
One default on an account from 2016

We have AIP for £210k, would be higher without the debt but we live on a cheap area and get get a lot for that budget. Our broker also advised there is one lender who would give us 5% deposit but high interest rates so we haven't gone down that road.

Or broker said unused cards are viewed differently by different lenders. Low credit utilisation can show you are trustworthy as have credit available but aren't using it, but other lenders may prefer less available. Ultimately if your credit accounts are well managed it isn't a deal breaker.

We should have paid off the majority of that credit card by the time we apply so I am not too worried about it. I am concerned with the deposit amount but I guess we can only do what we can do - if we are offered a smaller amount then so be it. The online calculators seem to tell us we can do it but I suppose it is more the interest rate may be higher?

You're getting really bad advice on here. Please don't close your unused credit cards!!!! That will destroy your credit score.

I closed a credit card once and it dropped my score 100 points!!

Your best bet would be looking at houses up to £180k on a 90% LTV deal. Find a decent independent broker to help you

@Shelddd credit scores are meaningless. Banks don’t see the ‘score’ they do look at available credit though incase OP decides to go max all her cards out the day after they buy the house

@BeaBeaBuzz

Your best bet would be looking at houses up to £180k on a 90% LTV deal. Find a decent independent broker to help you

We wouldn't be able to get a house for that price in my area 😞 £240k is probably the lowest we could go

I think there are a couple of lenders doing 95% just now so you might get lucky if you’re prepared to accept a not great rate for first term. Get a good broker and hopefully they can help you.

Sorry didn’t mean to sound like the prophet of doom

@BeaBeaBuzz

Sorry didn’t mean to sound like the prophet of doom

Not at all - I really appreciate all your help!

Don't close the accounts, it's good for you to have unused credit, although definitely pay off the 2k credit card debt, it doesn't make you look responsible, but instead dependent on credit. I'd also look to see if there's any cheaper properties, lenders are stricter at the moment so ideally you need below 90% LTV on the mortgage. Good luck, getting your first home is so rewarding!

@Winterjoy

My credit score app has 'credit utilisation' as one of the metrics for the overall score e.g. if I have £1000 total credit available and have used £800, then my utilisation is high (80%) and this negatively impacts my score. I don't know if this principle applies in general for credit rating, if so it may be worth keeping any 'empty' credit cards open.

Absolutely this. Keep the cards open.

Speak to a broker. But also, make sure your bank accounts are well managed, ie. not using overdrafts etc. make sure there arent lots of entries for online gambling etc, even if you can afford it, underwriters don't like it especially at higher LTV's and potentially stretching your affordability.
Your broker will love you if you have all your documentation ready and in order for first meeting, statements, payslips, ID. Sounds like you are doing the right thing OP, by looking into things thoroughly and taking your time, I'm sure you will find the right property for you. As pps said The bigger deposit you can get the better, even if 95% loans are available to you the interest rate will be much higher.

Agree with others who say not to close the credit cards. My score dipped and my utilisation rate increased when I closed two of mine.

Absolutely work with a broker but don't stretch to the maximum you're told you can afford. When I worked at a solicitors it wasn't unusual for lenders to their mind at the last second and decide an applicant couldn't afford the mortgage they had agreed in principal. It was rarely because anything had changed and the buyers ended up several hundreds of pounds out of pocket because they'd already incurred conveyancing fees.