Buying Tips

Getting a Loan? First Consider Getting A Pre-Qualification.

This is a very common scenario: Juan thinks he likes the house shown to him by the real estate broker. On impulse, he pays for a reservation fee to hold the property in his favour without even considering how much he has to cover for the down payment. A few days later thinks about mortgage financing.

Can you spot what’s wrong with Juan’s approach to buying?

Most likely than not, this will eventually lead him to losing his reservation fee… down the drain. Poor Juan, he never even knew what he is getting into.

Of course, Juan is not alone. I’ve seen many, many cases like this happen over and over again. I don’t know if it is the excitement of buying a house or just plain ignorance that caused them to be trapped into the deal.

For most of us, real estate is one of the most expensive investments we can make. That is why, many properties are bought in instalments, usually using mortgage loans with a little down payment.

Before you buy a piece of real estate, it helps if know the following:

The Amount of Down Payment you can comfortably shell out.
The Loan Amount you can comfortably shoulder.

Of the two, the second one is far more important because a mortgage loan entails a longer payment period and will probably take toll on your household budget.

The Loan Pre-Qualification Process

Pre-Qualification is an assessment process used to determine how much loan you can get. It can be either informal or formal.

An Informal Pre-Qualification can be done by you or by any real estate agent. This is a really quick-and-dirty method of determining how much you can afford based on the following factors:

Your income
Outstanding Debt

Since the person doing an informal pre-qualification is not really committed in giving you the loan, what usually happens is the whole process becomes simply an exercise in fantasy. That is, you could bloat your income or lower down your current debt. An ball park figure might come out giving you an idea of how much loan you can afford or you might be granted.

On the other hand, if you are really serious in buying a property, you should get a Formal Pre-Qualification. This process takes a little longer. At the very least, it involves the following:

Going to the office of a lending institution (Bank, Pag-IBIG)
Having you sign a Loan Application Form
You lay down your financial life on paper (your income, other assets, liabilities, outstanding loans, etc)
You may be asked some personal questions
Submitting some form of income documents
Checking On your Credit History

No Guarantee Of Getting A Loan

Take note that getting pre-qualified is not a guarantee that the lending institution will also grant you the loan that you can possibly afford. That involves an entirely different set of assessments.

The fact of the matter is you can pre-qualify yourself if you know the parameters used by the lender in the pre-qualification process.

The advantage of getting a formal pre-qualification is once you apply for a loan, the processing time will be a bit shorter since some preliminary steps have already been done in evaluating you as a loan applicant. The trick is to apply for a loan immediately as soon as you got pre-qualified. If you delay it, then you have to undergo another set of evaluations and a new set of fresh documents will be asked of you.

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This article on Loan Pre-Qualification is written by Carlos Velasco.

What Is Loan-To-Value Ratio?

by Pag-IBIG Financing Admin

A key concept in helping home buyers assess how much they can borrow to finance their real property investment is the Loan – To – Value Ratio.

The Loan–To–Value Ratio (LTV for brevity) is the amount of the borrower’s loan divided by the appraised value of the property.

LTV = (Loan Amount) / (Appraised Value)

To illustrate, assume that Mr. Delos Reyes purchased a new house by the countryside worth PhP 3,000,000. He plans to borrow Php 2,400,000 from a local bank to finance his real estate investment.

Applying the concept, we get a Loan–To–Value Ratio of 80% for Mr. Delos Reyes.

LTV = (2,400,000) / (3,000,000)
LTV = 80%

Take note that in this example, we are assuming that the selling price is also the appraised value. In reality, banks will conduct their own appraisal of the property. The resulting Appraised value is used instead of the selling price, to divide the loan amount to finally determine the LTV ratio.

Equity and Loan-To-Value

Actually, the LTV ratio is the reverse of a borrower’s equity. Therefore, in our set example, since Mr. Delos Reyes has an 80% LTV ratio; he has equity of 20%.

By equity, we mean “how much a borrower owns in the value of his / her real property investment.”

So in Mr. Delos Reyes’s case, he only owns 20% of the value of his investment and owes 80% of it.

From the lender’s viewpoint, the higher equity you have tied up on your property, the less risky you are as a borrower.

A high loan-to-value ration also means that a home buyer owes more than he owns in the value of his investment. Therefore, banks will see the home buyer’s loan as one that is risky.

Low Down, High Loan-To-Value

Pag-IBIG Fund is a leading company in the Philippines that offers lower down payment and a high loan-to-value ratio, as high as 97.0% is some cases.

Other financial institutions are offering the same. But you will be required to pay for a private mortgage insurance to lessen the impact of the risk that they are placing on you as a borrower.

Financial Leverage and Loan-To-Value Ratio

Financial Leverage means the use of borrowed money to finance a real estate investment. From an investor’s viewpoint, the higher the leverage, the better because of the following reasons:

Their risk is minimized
More Cash available for other investments

The Importance of Loan-To-Value Ratio

Financial institutions generally look for three vital factors when qualifying you for a loan. These are:

credit score
debt-to-income ratio
loan-to-value ratio

These factors are the benchmarks that helps the banks determine the following:

the amount of loan to give you
the interest rate of the loan
the loan term
whether the borrower is required to pay for a private mortgage insurance

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This article on Loan-To-Value ratio is written by Niel Kyro Jo.

Can You Afford That House?

by Pag-IBIG Financing Admin

“The ending is everything. Plan all the way to it, taking into account all the possible consequences, obstacles, and twists of fortune that might reverse your hard work and give the glory to others…” –Robert Greene, The 48 Laws of Power

This is very much applicable for first–time home buyers.

How much can you afford to spend?

That is the first question that you have to ask yourself. And once you get the answer, you’d most probably realize that you’ll have to borrow money to finance your dream home. This is what we call a mortgage.

For home buyers, taking out a mortgage is a big problem. And why is that? It’s because financial institutions, such as your local bank, might not want to lend you the exact amount that you need. It has a lot to do about the risk involved in lending you the money.

When you get pre-qualified for a mortgage loan, financial institutions are basically looking for answers to the following questions:

Do you make enough money to pay back your loan?
What is your credit rating?
Do you have assets that you can use as collateral?

With these questions, you are related to concepts of Income, Credit Worthiness and Collateral. Let’s tackle each one of these.

Do you make enough money to pay back your loan?

Banks would not only want to know how much money you currently have; they also would want to know how much you would likely be making over the next thirty or so years. They would also want to know your assets and liabilities, current and non–current. Your other properties, like your car and home, are also considered by the banks before they lend you anything.

Generally, banks would require you put 20% equity of the value of your property before they grant your mortgage. But some banks offer special financing arrangements that minimize the equity requirement.

What is your credit rating?

Credit rating is among the most important factors considered by the banks or lending institutions to determine the risk of lending you the money. What happens is they take a look at your financial history, your ability to pay your credit card bills, how much is your income and your expenses. A poor credit rating adversely affects your chance of getting a loan.

Do you have assets that you can use as collateral?

A collateral is simply a form of security usually an asset that you pledge to the lender should you default on your loan. It is a way for banks and financial institutions to shield them against the risks of lending you the money.

Collateral can be in any of the following forms:

Real Estate (home, land, farm, etc)
Cash Accounts
Shares of Stock
Insurance
Future Collectibles

What happens is you are giving them the right to take over the collateral should a loan default happen.

Don’t let this happen to you.

Now that you’ve understood the bank’s point of view, it’s time to look at your point of view.

Your Timeline

How long do you plan to stay in your new home? Make economic sense in your investment by not just buying and then selling it after three or so years of staying in the house. You do know that there are costs of buying and selling the property, which will be a lot if your property does not appreciate in value quickly enough to cover these costs. Weigh the pros and cons of buying and selling so quickly.

Your Comfort Zone

So the bank loaned you Php 8,000,000 to finance your new home, eh? That’s good. But how do you plan to repay this loan? Do you plan to repay this for the rest of your life?

The point here is, know your limits. Can you really afford to loan this amount when you have other obligations? Remember: your house payment is just a piece of your financial puzzle. Ask yourself what you’re ready to sacrifice in order to make that dream house a reality.

So if you’re planning to buy a home, look at the end. Can you afford it? If you see yourself eventually becoming homeless in the streets, then you have to reconsider. Maybe it’s not yet time to take that first step.

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Can You Afford That House is written by Kyro Jo as a guide for first-time home buyers. Kyro considers this to be the first step any home buyer should take when thinking about buying a home.