Real Estate Finance — Page 6 — Pagibig Financing

“What was I thinking?” a home buyer asks himself in disbelief after learning that he cannot actually finance his latest investment in an exclusive subdivision.

What he should have actually asked himself was, “What was I not thinking?”

Buyer Beware

Buyers, buyers, buyers. You should think twice, thrice, a hundred times, before you actually invest in real property.

Yes, you may be too excited to place a reservation on an attractive property perhaps because of the low supply and great demand for your dream house model, a pending price increase, or just because of your plain impulsiveness, but you must think and reflect before investing. A simple mistake in a Million–Peso investment will cost you a lot, and I mean a lot.

To shed light into this almost arcane world of real estate investments, here are some tips that you could utilize to establish how much you can actually afford to shell out to finance your home investment:

Tip #1: Be Honest With Yourself About Your Finances

Review your current financial status and contemplate on your future financial status. You could ask yourself these questions:

“How long am I in my current work?”
“Am I sure that my work visa will be extended”
“Is my employer at least happy with my current performance and would he be willing to extend my contract for a longer term?”
“Is my business doing well for the past couple of years?”
“Is my Cash Flow showing positive signs or is it indicating a downfall?”

Tip #2: Know The Formula

Planning to finance your investment through installment financing? Let me give you a formula that you can use to determine how much you can safely spend for your investment monthly.

Many financing institutions (banks, mortgage lenders, credit unions, etc) in the country are using this.

M = (I – D) / 3

Where:

M = the monthly payment that you can actually afford
I = your monthly income (plus your co–borrower’s, if any)
D = the monthly payment for any long term debt that you have, if any (example: car loan)

Example: Your monthly salary is PhP 250,000 and you are currently paying a whopping PhP 54,000 per month on your shiny, brand-new car. How much should your monthly real estate investment budget be?

Given:

I = Php 250,000 ; your monthly salary
D = Php 54,000; your car’s monthly amortization

Your maximum monthly budget is…

M = (Php 250,000 – Php 54,000) / 3
M = Php 65,333.33

This means that you have to get the “M” at a high amount so that your be labeled as a “risky borrower.” You wouldn’t want that to happen, right? It would just be demeaning. You see, banks would rather not grant the loan than to do the hassle of property foreclose.

So make sure that “M” results a high value so that bank executives will come knelling down your face while handing you the loan application.

Tip #3: Know The Alternative Financing Schemes

Some developers offer a “Deferred Cash” financing scheme. You might want to avail of this type of financing because it is payable at a short term only, plus it won’t be incurring any interest. Interesting, ain’t it?

Pay a visit to other banks and financial institutions searching for their loan interest rate and what they have to offer in general. Going for the shortest loan term and the lowest interest rate available is generally good for you. You will be saving more this way in the long run.

Again, exercise some common sense before you make any commitment.

So to my future home buyers, always think ahead. Check your savings and cash flow. Anticipate any possible financial problems that may arise in the future and take preventive measures before they happen. As the clichéd adage goes: “A fool and his money are soon parted.”

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Home Financing For the Clueless Buyers is written by Kyro Jo.

Real estate properties are seldom bought on spot cash. The vast majority are purchased with a little down payment and mortgage loans on the balance.

A mortgage loan is a form of secured financing; that is, the lender gives you the needed financing and in return you pledge the property as collateral.

In a mortgage loan, there are two very important documents that you will be committed to:

Note – is a promise to repay the loan on a timely basis
Mortgage or Deed of Trust – is a pledge to secure the loan with the real estate in question in case the borrower fails on his loan obligations.

A mortgage creates a lien on the property, which gives the lender the right to foreclose the property in question.

A loan default happens when you fail to repay the loan “on time” as stipulated on the contract. If that happens, the lender can foreclose the mortgage and take on the property.

Interest Rate and Loan Term

A mortgage loan has two very important components that you need to be aware of.

Interest rate – is the price of using the lender’s money and is applied to the principal balance. A lower interest rate means a cheaper use of the lender’s money and should be good for you.
Loan term – the time it takes to pay off the whole amount borrowed. Loan term usually spans a number of years.

These two factors primarily affect the installment payments, which is usually on a monthly basis.

The amount shown on the monthly installment schedule always remains constant. When you pay off a loan, a portion goes to the interest payment and another portion goes to pay off the principal amount. In other words, the principal balance is reduced with each payment that you make. And as a consequence, the interest is also reduced as the loan matures. Early installments mostly go to the interest payments while later installments mostly cover the principal.

Down Payment and Mortgage

Most lenders will not grant you a loan that is equivalent to the selling price of the property. In many cases, they will have to appraise the property and you will be asked to put a down payment and loan the remaining balance of the appraised value.

The down payment is sometimes referred to as equity on the property.

The standard down payment is 20% of the appraised value of the property; 80% being your loan or the financed amount.

The more money you put as down payment, the lower your loan will be. And always remember that the loan bears an interest.

Now comes the question: Which is better of the two?

A low down payment and large loan.
A large down payment and small loan.

There are arguments favoring one over the other. It’s all up to you and your circumstances. But sometimes, the lender will force you to take on lower loan (with large down payment) to lower their risk of loaning you the money to finance your real estate purchase. That’s just pure business.

Pag-IBIG Mortgage Loan

Depending on the property and where you are buying it, Pag-IBIG Fund may give you a large amount of loan which is almost equal to the selling price of the property. But always bear in mind the maximum loan amount the Pag-IBIG Fund can grant you. If you find the amount too small for the property you are considering, you may need to come up with a large down payment or you may use an alternative financial institution.

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Mortgage Loan Fundamentals is written by Carlos Velasco.