“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.