Financing Your Home Purchase with a Housing Loan
If you have saved enough cash to buy your first home or better yet, if your wealthy parents gifted you with a house, you belong to that lucky breed of people with a readily-available first home. Some people dislike paying interests on loans so they really save up to be able to buy their home, in cash.
On the other hand, if you are over the moon for that beautiful dream house or condo unit and you are psychologically and financially prepared to purchase it through a loan, your experiences reflect what a lot of first-time home buyers go through. The Philippines is riding a prolonged real estate boom and interest rates are the lowest in decades, so you can carefully weigh in your financing options.
General Guidelines on Financing
The loan that you take out to buy your house can come from either a personal source (from parents, family or friends) or from a financial institution, usually a bank. If you are a Pag-IBIG member, you can avail of Pag-IBIG’s housing loan program.
Mortgages and Collaterals
Should you decide to approach a bank or a financial institution like Pag-IBIG for a loan, that loan is called a ‘mortgage’. A mortgage is a large loan that is secured against an asset, which shall be called a ‘collateral’. In most cases, the house or unit that you want to purchase through financing is the same asset that the bank shall use as collateral. In the unfortunate event that you fail to pay your monthly amortization for a prolonged period of time, the bank’s security is your house or some other asset (either a deposit with the same bank or another property) against which your loan is collateralized.
Of course, whenever there are loans, there are interests. Interest is the income, in absolute amount, earned by the lender in letting you borrow money. It is computed based on interest rates, expressed as a percentage of the principal for a specific period, normally one year. Interest rates vary:
- from bank to bank
- based on the loan amount
- based on the duration of your loan, also known as ‘payment term’
- based on your credit worthiness as a borrower: a low-risk borrower is charged a low interest rate and a high-risk borrower is charged with higher interest rates.
Amortization is the act of paying off a debt over a period of time, usually in equal amounts. Your monthly amortizations will include payment for the principal loan and the interest. Typically, a loan with a longer payment term has higher interest but a lower monthly amortization. Depending on your capacity to pay or your aversion to paying interest, you can pick between (a) low monthly amortizations-longer payment term-higher interests scheme OR (b) higher monthly amortizations-shorter payment term-lower interests scheme.
Banks and other financial institutions adopt different ways of assessing if you are a good candidate for a loan but there may be common standards in evaluating your credit worthiness. Simply put, credit worthiness is an individual’s capacity and track record of repaying financial obligations. Banks look at the following:
- income stability (if you’re employed, the number of years you have been connected with an employer; if you’re in business, the number of years the business has been running and how the business has performed)
- credit history
- a sizeable down payment, which is around 20% of the property’s total value
If you have other debts and you plan to approach a bank for a loan, it is highly suggested that you lower your debt-to-income ratio by paying off some bills. The debt-to-income ratio is the amount of your debt as compared to your income. Even though your loan application comes with a mortgage, banks will take a second hard look at your credit worthiness when your debt obligations are not paid regularly and on time or will lower the loan-to-value ratio of the asset that you shall put up as collateral.
Choosing Your Lender
When shopping for a bank from which to borrow, please consider the following:
- interest rates
- re-pricing policy – re-pricing is the time frame when you and your bank talk about interest rates again, after the initial payment term you both agreed upon at the start of your loan agreement
- how it handles its customers
In many ways, choosing your banker is like choosing your doctor or dentist: you choose your doctor or dentist carefully and over time, you cultivate a healthy respectful relationship that is based on mutual trust. After all, doctors and dentists poke into your body and mouth, so you need to trust them to do the right thing for you.
In essence, what we are saying is this: choose your bank well. Visit their website, go to the branch of your choice, talk to the bank staff, get a feel of the atmosphere. If you have had an unpleasant experience with a bank, there are other banks around that are willing to take your business.
And of course, there is PAG-IBIG. As a member of good standing, you can avail of their housing loan facility up to a maximum of P6,000,000 depending on the member’s actual need, loan entitlement based on capacity to pay or loan-to-appraisal value, whichever is lower.
Requirements for Loan Application
There are standard requirements when one applies for a loan from a bank or a financial institution. Some of the most common requirements are as follows:
- IDs (these days, these are called ‘competent proofs of identity’) – driver’s license, SSS/GSIS ID, passport, company ID, voter’s ID, postal ID
- Income Tax Return (ITR) – latest; sometimes, banks ask for at least 2-3 years of ITR duly accepted by the BIR; this hopes to establish your income stream over a period of time; the ITR requirement is applicable both for the employed and the self-employed loan applicant. If you are employed, check your ITR with your company’s HR or Accounting Department, who submits your ITR on your behalf under the BIR’s substituted filing system
- Certificate of Employment – if employed
- DTI or SEC Registration – if self-employed
- Credit Card Statements –sometimes, banks ask for statements of the last 2-3 months prior to your application; this should establish your payment habit and credit history.
- Proof of Billing – normally refers to a utility billing like electricity, cable, cellphone or water billing; this should establish that the loan applicant has been living in a more or less permanent address over a period of time. Of course, when your loan has been approved and you are able to buy your house or condo unit, you should coordinate with the bank about your new address if you plan on residing in your new house
- Marriage License – for married loan applicants
- Birth Certificate – for unmarried loan applicants
For Preselling Properties
- Contract to Sell
- Deed of Undertaking – In most cases, titles for the property being purchased will not yet be available. The Deed of Undertaking is an agreement between the developer and the bank that the developer will cause the submission of the unit titles at a future date.
For Resale Properties
- Owner’s Copy of the Title (Transfer Certificate of Title or Condominium Certificate of Title) – New title already transferred to the name of the buyer/mortgagor.
- Tax Declaration – A new tax declaration under the name of the buyer/mortgagor.
- Real Property Tax Receipts – Originals of the Real Property tax receipts.
- Tax Clearance – A new tax clearance under the name of the buyer/mortgagor.
- Statement of Account – Statement from the seller indicating how much has been paid by the buyer/mortgagor and how much of the balance remains.
Some things to keep in mind….
- Loan to Value Ratio of Preselling versus Resale Properties. Housing loans provided for preselling properties can have a higher loan to value ratio compared to resale properties. Preselling properties can sometimes have loans covering 80% of the property value whereas resale properties, particularly ones with an improvement (ex. house or condo), can have loan to value ratios at 50% to 60% of the property value only. Why?? Depreciation. This means you’ll need to shell out a higher downpayment for some resale properties. Take note also that most preselling properties have stretch payment terms for the downpayment. So if you don’t have a lot saved for a downpayment, it would be good to look at preselling properties as an option.
- Processing Fees. Besides the interest rate, be ready for the processing fees for your housing loan. In general, with bank loans for example, budget at least 3.5% of the loan amount for fees. Depending on the bank, some require payment of processing fees upfront while some tuck in the cost with the amortization.
- Title Transfer. I need to transfer what??? It sometimes comes us a shock to property sellers of resale properties when they learn that the title to their property needs to be transferred to the buyer’s name first as a prerequisite for the bank to release the loan proceeds to the seller.
Jacqueline G. De Pedro
Director for Sales & Operations | Co-Founder
Real Estate Broker License
PRC Reg Certificate AA019210
PRC License No. 0019560