What Are the Best Practices for Securing Financing and Home Loans?

Securing financing and home loans is a complex process that involves research, planning, and careful budgeting. As an investor or prospective homeowner, you need to know the ins and outs of this process before getting started. It’s actually easy to overlook this step, but securing financing and home loans smoothly will help you avoid delays and additional costs down the line.

You can avoid costly mistakes by making sure you have all of your paperwork together before beginning the application process. Doing your due diligence and research will serve your best interests in the long run.

Understand Different Types of Loans

There are many types of home loans, and understanding the differences between them can help you determine which one is right for your needs.

1. Bank Financing

This is currently the most common method for financing a house purchase in the Philippines. Banks offer long-term loan packages, usually spread over a period of 5 to 25 years. They typically require at least a 20% down payment and include annual interest rates. Customers may also opt for either a fixed or variable interest rate depending on their preference.

Advantages:

• Longer payment terms
• Lower interest rates
• Flexible loaning process

Disadvantages:

• Requires a high amount of down payment
• Banks have extensive approval processes to determine creditworthiness

2. In-House Financing

This type of financing is provided by the developer themselves. It is considered the simplest and easiest way to finance a home purchase but often comes with higher interest rates. This type of financing can be a good option for buyers who have difficulty qualifying for a traditional mortgage from a bank.

Advantages:

• Easier to avail
• Less stringent paperwork and requirements
• Fast approval time

Disadvantages:

• Higher interest rates
• Shorter payment terms

3. Pag-IBIG Housing Loan

The Home Development Mutual Fund (HDMF), more commonly known as Pag-IBIG, offers housing loans for Filipino citizens. Pag-IBIG offers lower interest rates and the loan term can be spread over 30 years, making it easier to pay monthly installments.

Advantages:

• Lower interest rates
• Longer payment terms of up to 30 years
• Requires a smaller down payment

Disadvantages:

• Long processing and underwriting time
• Requires steady contributions to the Pag-IBIG fund

4. Other Government Housing Loans

The government, through the Social Security System (SSS), also offers housing loans for its members. The loan amount is dependent on the member’s monthly salary credit and the number of contributions, among other considerations.

Advantages:

• Member contributions determine the loan amount
• Loan tenor up to 15 years

Disadvantages:

• Limited to members who have paid contributions regularly
• The loanable amount might not be enough for high-value properties

Before settling on a financing option, consider all factors, such as your income, the amount of loan needed, repayment period, and interest rates. It is essential to choose the financing scheme that will be least burdensome for you while ensuring security over your dream home.

Assessing Your Financial Standing

The first step to securing financing for your home is to assess your financial standing. A thorough assessment allows you to understand your purchasing power, identify suitable property options, and select the most appropriate financing method.

1. Evaluate Your Income and Expenses

To do this, compile all your income sources, such as monthly salary, freelancing payments, business profits, and any other regular monetary inflow. Next, categorize and tally up both fixed (e.g., housing rent, utilities, loans) and variable (e.g., groceries, transportation, leisure) monthly expenses. Finally, calculate your disposable income by subtracting your total expenses from your income to determine your discretionary funds or your potential savings capacity.

2. Assess Your Debt-to-Income Ratio

Calculate your debt-to-income (DTI) ratio by dividing your total monthly debt payments by your total monthly income. A lower DTI ratio—ideally below 40%—indicates a better financial standing for homebuyers.

3. Evaluate Your Savings and Emergency Fund

In most home financing schemes, you are required to provide an initial down payment on the property, which can range from 10% to 30% of the property’s value. Assess your savings and allocate funds for the down payment.

Maintain an emergency fund of at least 3 to 6 months of living expenses before purchasing a house. This safety net will protect you from potential financial crises.

4. Check Your Credit Score

Lenders use credit score to determine whether or not you should be approved for a loan. A poor credit history will likely result in higher interest rates and other penalties that can increase the cost of borrowing money.

In the Philippines, a credit score is a three-digit numerical value from 300 to 850. The higher your score, the more likely you are seen as creditworthy by lenders. To evaluate your credit standing, you may request a credit report from the Credit Information Corporation (CIC) or any credit bureaus authorized by the CIC. Make sure to your credit report and score and check for any inaccuracies.

Pay off any outstanding debts, if possible, to improve your credit score. As such, there are several steps you can take to improve your credit score before applying for a mortgage:

• Avoid opening new accounts (e.g., bank accounts) while working toward obtaining financing; this will help prevent any potential confusion between two similar lines of credit when it comes time for lenders to review applications
• Review all outstanding loans on record with each bureau so that any discrepancies between what was reported by creditors versus what was actually owed have been corrected prior to submitting paperwork

If you are unsure about your financial assessment or the steps to take, it’s wise to consult a financial advisor who can provide expert advice based on your financial situation.

Research Lenders

Knowing the different types of loan options is one thing, but choosing where to borrow from is another equally important matter. When you’re researching lenders, it’s essential to research and compare the loan terms, eligibility requirements, and interest rates offered to make the best decision for your financial needs.

• Banks. Banks are usually the most common type of lenders because they have access to large amounts of money from depositors and investors. They also have extensive experience in making loans for homes and other types of property assets. However, Banks typically have more stringent lending requirements than other types of lenders, but they also offer more competitive interest rates.
• Credit Unions and Cooperatives. Credit unions are similar to banks but tend to be smaller institutions with more personalized service–they may provide better rates on mortgages than larger financial institutions as well because they offer fewer products overall (which reduces overhead costs). Additionally, some credit unions provide services specifically geared toward first-time homebuyers or low-income individuals who cannot qualify for traditional mortgages due either lack of sufficient income or bad credit history. The downside is that credit unions and cooperatives are not as widely available as banks and would typically have lending limits.
• Microfinance institutions and non-banking financial companies (NBFCs): These organizations provide small-scale financial services, including loans, to low-income borrowers who typically lack access to traditional banking services. MFIs and NBFCs typically offer smaller loans than banks, but they may be more willing to work with borrowers who have less-than-perfect credit or who do not have a lot of money saved for a down payment.
• Government agencies: Institutions such as the Pag-IBIG Fund and the Social Security System (SSS) provide housing loans and other financial assistance to eligible citizens. These loans usually offer lower interest rates and longer payment terms, making them an affordable option for many Filipinos. If you are a Pag-IBIG or SSS member and you have enough savings, then you may want to consider a loan from one of these institutions. The lower interest rates and more flexible lending requirements can make a big difference in your monthly payments. However, if you do not have enough savings or you are not a member of Pag-IBIG or SSS, then you may need to consider a loan from a commercial bank. Commercial banks typically offer relatively higher interest rates and more stringent lending requirements, but they may be able to lend you more money.
• Online lending companies and alternative lenders: The growth of digital finance has paved the way for online lending platforms that offer quick, convenient personal loans and cash loans. These companies leverage digital technologies and often have more lenient eligibility requirements compared to traditional lenders. They may charge higher interest rates since they take on more risk when they make these loans. Also, these lenders often have shorter terms than traditional lenders. This means that borrowers will have to pay off the loan more quickly.

Choosing the right home loan lender is crucial as it can significantly impact your ability to achieve your homeownership goals. What are the important factors to consider when choosing a home loan lender?

1. Interest Rates

Interest rates will determine the overall cost of your loan. They can vary significantly between lenders, so it’s crucial to shop around to find the best available rate. Remember, even a small difference in rates can make a significant difference over time.

2. Loan Types and Terms

Lenders offer different types of loans, such as fixed-rate or adjustable-rate loans. Consider your financial situation and preferences to decide which type will work best for you.

3. Transparency and Consultation

A good lender will clearly explain all costs, fees, terms, and rates associated with the loan. They should be able to answer all your questions and provide sound advice based on your needs and circumstances.

4. Reputation and Customer Service

Consider the reputation of the lender. Read customer reviews and testimonials to understand the lender’s reliability and customer service.

5. Processing Speed

Some lenders process loans more quickly than others. If you’re in a hurry to close on a house, you might want to choose a lender known for quick processing.

6. Closing Costs

Closing costs can vary from lender to lender, and they can add up. Know what costs to expect and whether those costs are included in your loan estimate.

7. Pre-approval and Lock-in

Some lenders offer pre-approval or a rate lock-in, which can provide peace of mind as you search for a house. However, be aware that not every lender offers these services, and there may be associated costs.

Get Pre-Qualified or Pre-Approved

A pre-approval is a lender’s preliminary assessment of your creditworthiness and ability to obtain financing. It takes into account your income, debts, and other financial information, as well as the property you are looking to purchase. The pre-approval process involves gathering this data and then running it through their automated underwriting system to determine how much money they may lend you given those factors.

What does this mean for you? With a pre-approval in hand, you can begin shopping with confidence knowing exactly what kind of loan amount you qualify for–and whether or not there are any obstacles that would prevent closing on time (such as insufficient funds).

Making an Offer and Undergoing the Loan Underwriting Process

After doing all your loan preparations, including an assessment of your financial situation; choosing the type of financing as well as the lender, it’s time for you to make your offer. Being well-prepared is a way for you to be in a position to make a proactive offer and negotiate your own terms. Otherwise, you may find yourself aimlessly trudging through the whole process. After your offer has been accepted, you will go through the loan underwriting process.

Making an Offer

1. Find the Right Property: Collaborate with a good real estate agent, and conduct thorough research on the area where the property is located.
2. Make a Written Offer: Once you find a suitable property, make a written offer to purchase it. Include your offer price, payment terms, and other relevant details to present your case.
3. Negotiate the Offer: If your initial offer is not accepted, you may need to negotiate the terms and price with the seller. An experienced real estate agent can guide you through this process.
4. Sign the Contract: Once your offer is accepted, the seller will prepare a Contract to Sell or Deed of Absolute Sale, which you will need to sign and notarize.

Loan Underwriting Process

The loan underwriting process involves a comprehensive evaluation of the borrower and the loan application to determine the borrower’s creditworthiness and whether the loan should be approved. Here are the typical steps in the loan underwriting process:

1. Mortgage Application: Submit a loan application to your chosen lender. The application will require detailed information about your income, assets, liabilities, and a credit report.
2. Loan Processing: Once the application has been submitted, a loan processor will verify all the information and documentation provided.
3. Loan Underwriting: Following verification, an underwriter will review the loan application. They assess the risk associated with the loan, validate your financial information, check your creditworthiness, and scrutinize the appraisal report of the property.
4. Approval, Denial, or More Information Needed: If the underwriter approves the application, the loan terms will be finalized and the loan can be closed. If the application is denied, the borrower will need to look into other financing options.
5. Closing: Once your loan is approved, you will sign the final agreement, pay any necessary closing costs, and the loan will be disbursed to the seller.

Remember, the loan underwriting process can vary depending on the lender, loan type, and specific circumstances. The process is designed to mitigate risk for the lender and ensure responsible lending practices. Ensure to stay in constant communication with your lender during this process.

Closing

Closing is the final step in the loan process before the funds are disbursed and the property ownership is transferred to the borrower. The lender will send you a packet containing all of the paperwork they need from you, which includes:

• A copy of your signed purchase agreement (contract) with all attachments such as disclosures and addenda
• Proof that there are no liens against the property (such as an existing mortgage)
• Bank statements showing enough money in the account to cover closing costs

The borrower is responsible for paying the closing costs, which may include fees for the loan origination, appraisal, title search, title insurance, and other expenses. These costs can be paid at the closing or rolled into the loan, depending on the agreement.

Review all the documents carefully, ask questions, and seek assistance from professionals, such as real estate agents or attorneys, to ensure a smooth closing process.

Best Practices in Loan Repayment

Practices for loan repayment for home buyers vary based on their individual circumstances, but here are some widely accepted strategies to consider:

1. Making Biweekly Payments: Rather than making a single monthly payment, consider making biweekly payments. By doing so, you essentially make one extra month’s payment per year, which can shorten your loan terms and reduce the amount of interest paid over time.
2. Budget for Extra Payments Annually: If possible, try to set aside a budget for an extra payment each year. This can help reduce your principal faster and decrease the total interest paid.
3. Making Extra Repayments: Making payments over your regular installments can help you pay off your loan earlier and save on interest. The extra payment directly reduces the principal and decreases the term of your loan.
4. Using a Loan Repayment Calculator: A loan repayment calculator can help you determine monthly payment options and total interest incurred on any loan, allowing you to plan your budget effectively.

Always remember that you can and should communicate with your lender when necessary. If you’re unable to make payments, many lenders have hardship programs and are willing to work with homeowners to alter the terms of the loan.

As you begin to repay your loan, it’s important to consider the possibility of refinancing. Refinancing allows homeowners to take out a new loan with better terms than their original mortgage, often at lower interest rates and with lower monthly payments. If you’re planning on refinancing in order to consolidate debts or reduce monthly payments, there are some things that may need to be taken into consideration before applying for a new loan: If your home value has dropped since signing on the dotted line (or even if it hasn’t), lenders will want proof that this isn’t going to affect their investment in case they decide they want out early on down the road. This means having an appraisal performed by an independent appraiser who specializes in residential properties like yours.

Don’t give in to pressure

The best way to ensure that you are well prepared for the home loan process is by spending time researching your options. You should take steps to ensure that you are financially ready, such as putting down a deposit and getting pre-approved for a loan. If this is not possible, be sure to have all of your current debts paid off before applying for financing.

Finally, here are additional tips to increase your chances of getting the loan you are aiming for:

• Avoid major financial changes: During the loan application process, refrain from making significant financial changes, such as changing jobs, taking on new debts, or making large purchases.
• Provide complete and accurate documentation: Lenders require various documents to verify your income, assets, and debts. Providing accurate and complete documentation can expedite the approval process.
• Work with an experienced mortgage broker or loan officer: They can help you navigate the mortgage process and find loan programs that suit your needs.
• Shop around and compare: Obtain quotes from multiple lenders to ensure you’re getting the best available terms and rates.