Easy steps to prepare your finances for a mortgage – Salaryman Edition
Buying a “house” could be one of the biggest purchases of your life. Whether you want to buy a home for your parents or your partner, it is significant to note how much square footage would fit your family and how much you can afford. Here is the list of what you will need to know about buying a house.
Are you financially ready?
There are 3 questions home buyers should answer;
1. Look at your income and expenses. Recoding and monitoring your income and expenses help you understand where your money goes and whether you overspend. There are many applications you can use to easily track your spending, such as, Money Manager Expense & Budget, Spendee, Money Lover. You can then try tracking your expenses for 3 months to recognize your spending pattern and know how much money you have left. You may realize where you can spend less to save up for mortgage installments.
2. Credit card spending behavior. Do you pay off your credit card bills in full or carry a balance from month to month? Do you pay the bill on time or late? Carrying a balance may be convenient but can also hurt your credit score and affect bank loan approval.
3. Practice makes perfect. Because the rule of thumb for every loan assessment is to keep loan payment under 40% of total income, you can try saving up 40% of your income for 3 months. By doing so, you can then assess your financial position and find ways to balance your expenses with your mortgage installments.
Tips for obtaining your mortgage
Simply put it as your credit rating. Your credit score indicates how much debt you currently possess and how you handle debt payments. A good credit score means paying off your balance (or over balance) quickly. If you happen to have late payments in your credit score history, you can still get your loan approved.
If a late payment occurs within one week, following payments should be on time at least within six months before you file a loan application.
If a payment is more than one month past due, following payments should be on time at least within two years before a loan application is filed.
The next factor is income. As far as banks are concerned, your monthly income/ salary is key to loan approval. If you have other sources of income, such as, commission, overtime payments, banks would calculate the average of these income sources over the last 3-6 months and account for 40-50% of the amount towards loan approval process. The process may vary across banks.
Asset Price (House for Mortgage)
You should first obtain the information about the sales price and the appraised value to estimate the down payment. In most cases, banks grant 80-90% of either the sales price or the appraised value, whichever is lower.
There are 2 types of bank interest rates;
1. Fixed interest rate – the interest rate remains constant for the duration of the loan. Fixed rate is better in a rising interest rate environment.
2. Floating interest rate – floating interest rate depends on the base rate offered. Floating rate is better in a declining interest rate environment because you can save the interest cost.
Floating interest rate can be further divided into 2 types;
• MLR (Minimum Loan Rate) – the interest rate designated for qualified large borrowers
• MRR (Minimum Retail Rate) - the interest rate designated for qualified individual borrowers
The rates offered by banks vary, so it is advisable to do some research and find out which bank has the best offer. You should pay close attention to the first 3 years as most banks offer best rates during the first 3-5 years. Examples are as follow,
Period Loan Interest Rate
Month 0-6 0%
Month 7-12 2%
Month 13-60 5%
Month 6- Year 30 MLR-1%
How should you strategically plan for your mortgage approval?
Make a large down payment
Because banks usually grant 80-90% of the actual house value, large down payment results in smaller installments and increase the likelihood of getting your mortgage approved.
File for the longest loan duration
The longer the loan duration, the lower the monthly installments. Many people may want to pay off their mortgages fast because the accumulated interest paid could be higher than the actual property price. However, the future is uncertain. If, one day, your income does not meet your mortgage obligation, your credit score will be hurt. So, it is better to opt for a longer loan duration because you can then make extra payments whenever you want.
Watch out for fees for taking out a mortgage
There are a number of fees and charges you might need to pay if you are taking out a mortgage. These include contract fee, house deposit, mortgage registration fee, transfer fee, stamp duty, etc. Before you enter into a mortgage contract, you should agree with the seller which one you need to pay.
A small note to remember
Owning a home is an ultimate goal for many people. First jobbers with a slightly moderate income and little financial burden are probably able to take out a mortgage. However, in the next five to ten years when both income and liabilities might increase, banks might grant higher loan amount based on your credit history. At that time, you may want to go for a bigger house that fits you and your family better.
As mentioned above, owning a home is a big commitment and is a truckload of work. Before buying one, you should do your research thoroughly since home ownership is a long-term move. Therefore, you need to know what you are getting into and make sure you check out little details in order to get a home that fits best.