Buying a property is one of the most significant transactions most people will ever undertake and if one is not well prepared it can be a very long drawn out and tedious process. If you think like the lender and try to provide answers to all their questions and the documentation that they will need, the process will certainly be quicker and less stressful and you will be in a better position to have your home loan approved.
You need “skin in the game”
If you are considering applying for a home loan or mortgage quite soon, you will need to have some savings for a down payment without which you are likely to be turned down. It is always best to try to accumulate these savings over an extended period of time.
Remember that a mortgage comes with other costs. Apart from the actual purchase price of a property, which reflects its location, features, age and condition, there are other significant transaction costs that come to bear including lenders fees, valuation and survey fees, estate agents fees, legal fees, transfer taxes, stamp duty and insurance cover. Closing costs can be as high as an additional 5 percent of the mortgage balance.
Don’t quit your job
Avoid resigning whilst you are going through the process unless you have some certainty of a new job. Changes in your employment or income can derail the whole mortgage process, as a pre-requisite for the application is a verifiable source of income – usually a minimum of N150,000 a month. Stay with your employer whilst you are going through the process. . Lenders must evaluate your finances and if you are inbetween jobs or have accepted a lower paying job you could be jeopardizing the approval. If you own your own business, the lender will want you to answer more questions and provide more information.
Get pre-approved for your home loan
Getting pre-approved before you even start looking for a property is an important step as it helps you to determine how much house you can afford. It is painful to view so many wonderful properties only to find that you don’t qualify. The pre-approval process should be quite simple. The lender will evaluate your financial and personal information to determine how much you can afford to borrow at prevailing interest rates. Armed with the pre approval letter you can then confidently search for your property within the stipulated price range.
A word of caution is important though; lenders largely base their decision on the paper work that you submit and can pre-approve more than you can actually afford. Whilst that may appear generous you do not want to be lumped with a mortgage that you will struggle to pay off. Be honest with yourself as you know all the other expenses that you have including school fees, groceries, transport and utility costs which are not fully reflected in the documentation that you must provide.
Lenders consider “The 5 C’s of Credit”; character, capacity and collateral, capital and conditions, in arriving at their decision to extend or withhold credit.
Character, is the most important of the C’s. Do you pay your bills as and when they fall due? From your personal background, employment history and borrowing behaviour, a lender may decide whether you possess the integrity, honesty and reliability to repay your debts. A borrower that is honest and reliable will be a good candidate for a loan.
Capacity. How much debt can you comfortably handle? Can your monthly income support your borrowing? Lenders use the debt-to-income ratio to measure how likely you are to repay the loan. They want to know what your monthly income is and if there is any supplementary income from bonuses, dividends or rental income. The lower your outstanding debt is in relation to your total income, the more confident a lender will be that you can afford the mortgage.
Capital represents the savings, investments, and other assets that can be liquidated if necessary to help you to repay the loan. This demonstrates your ability to save and have a cushion in place in the event that you face difficulty. This will make a lender more comfortable.
Conditions. What is the current state of your personal finances; what has your financial situation looked like in the last five years, and what will they look like over he next five years?
Collateral. When a loan is secured you must pledge something you own as collateral. This may include your bank accounts, investments such as stocks, mutual funds, bonds, property, and other assets.
There are several reasons why an application might be declined and different creditors may reach different conclusions based on the same facts. Where one creditor may find you an acceptable risk, another may adopt a more conservative stance and deny you a loan. Your borrowing behaviour largely determines your credit worthiness. It is thus important to build a good credit history and repayment culture, always committing to honour all your obligations as they fall due.
Nimi Akinkugbe has extensive experience in private wealth management. She seeks to empower people regarding their finances and offers frank, practical insights to create a greater awareness and understanding of personal finance.