Homes are purchased every day; however, it seems like many people are largely unaware of how such a significant asset is acquired and the various facilities available to assist said purchase. Perhaps the most well-known of these facilities is the mortgage, although to most only the term is known, while the actual mechanics are a mystery.
According to Investopedia, a mortgage is “…a ‘debt instrument’, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.”In ordinary speak, a mortgage is a loan you take where the collateral of the loan is real estate. While most people relate this to the purchase of property, you can also take a mortgage out on property you already own, i.e. use property you already own as the collateral for a mortgage. This would be beneficial if you needed a large loan.
Now that we know what a mortgage is, we need to understand what is needed to obtain one. To qualify for a loan, banks require specific criteria to be met. Different banks will have their own requirements, but there are a few general criteria used:
A credit history and rating: This speaks to your having a pre-existing relationship with debt. What banks look for here is evidence of your ability to manage debt, to ensure you can handle the responsibility of a major loan like a mortgage. Car loans, credit cards and small loans are some common ways you create a credit history for yourself.
Down Payment: Most banks require you to have saved enough for the down payment on the property you are interested in purchasing. Traditionally this down payment is around 10% of the property’s purchase price; in response to rising real estate prices and stagnant incomes however, many banks have started to relax the amount of initial funds required, although a lower down payment often comes with higher interest rate on the loan, higher monthly payments to be made and a longer payment period.
Payment for Legal and Processing Fees: Anyone who has purchased a property can tell you that if a house was listed at $1m, you’ll end up paying closer to $1.1m; that extra $100,000 is attributable to legal and processing fees attached to the transfer and purchase of the property. First time home owners can get caught by this, not realising the true cost of the property. A good estimate would be to have 10% of the property’s cost set aside for these additional fees.
A good Debt Service Ratio: ‘Debt Service Ratio’ is a calculation of the amount of your income that goes towards paying debt. Again, debt here refers to any money you have officially borrowed from a lending agent, such as a bank or credit union e.g. car loan or credit card. Banks usually have a cap on your DSR of 50%, meaning that the portion of your income spent on paying off debt is less than 50%.
These are some of the most common requirements banks have, however every bank is different. In this vein, here are some additional helpful tips related to obtaining a mortgage:
Do your homework. While most banks will have a mortgage loan option, not all offerings are equal. Do your research and compare banks’ mortgage requirements, interest rates, maximum term periods, ability to be flexible with said rates, requirements and term periods and what their general customer service is like. Choose a bank that matches your needs as best as possible, rather than forcing yourself to go with the bank you’ve been with for the last umpteen years.
Start early. Most Mortgage terms – the length of time you have to repay the loan – usually go up to 60 years of age, with a few banks offering a term to age 65. This means the older you are when you take out a mortgage is the less time you have to repay, which then translates into larger monthly payments and possibly higher interest rates. Getting educated about and preparing for a mortgage as early as possible will help a lot in the long run.
For more information on mortgages, the mortgage process or debt management, a simple call, walk in or email to the banks you are considering can help shed light on this process and help you compare the banks side by side. Armed with this knowledge, you’ll then be able to make the best decision for your wallet and comfort thereby making home ownership much more attainable.