Mortgage Application Tips
So, you have a solid budgeting plan together and your finances are under control; and now you have made the decision to purchase your first home. This is exciting news, especially for a first-time homeowner! Although this new stage in life comes with a warm and fuzzy feeling, it can be overwhelming. Have no fear though, GET MONEY SMART BAHAMAS is here to provide you with a few tips to help you get through this big step.
FIRST THINGS FIRST!
Before you get started with your hunt for the best deal, it is important to know that there are different types of mortgages that can be offered to you.
Fixed-rate mortgages: This simply means that the interest rate you receive will be the same interest rate throughout the life of the mortgage. Your principal and interest payments will remain the same, which provides some stability benefits when considering your budget.
Adjustable-rate mortgages: These are mortgages that have fluctuating interest rates depending on fluctuations of the prime rate, which is determined by the Central Bank and defined as the lowest rate of interest at which you can borrow money. Although not extremely common in The Bahamas, this may also be an option depending on your bank of choice.
Construction mortgages: This is important to know if you plan on building your home from the ground up. A construction mortgage is a loan that allows you to cover the costs of the actual construction of your home. In some cases, you only pay the interest payments on the loan during the construction period, and once the project in completed, it is converted into a regular mortgage with regular principal and interest payments.
Now that you are all caught-up on the terminology, here are 7 tips to help you apply for a mortgage:
1. Pre-qualification is a must!
Being prepared mentally and financially is one of the best things you can do to assist with a smooth application process. A good way to avoid being blindsided is to get pre-qualified for a mortgage ahead of time. This gives you an idea of what you can realistically afford, what your interest rate might be, and what your monthly payment might be. To get pre-qualified, your bank will need an idea of your income and your credit capacity to repay a mortgage. Some banks also go through a formal pre-qualification process where they look at your income in depth, taking into consideration your salary deductions and other debt priorities. They may also prepare a pre-approval letter that will show real estate agents and appraisers that you are serious about purchasing or building a home. Best of all, this process is usually provided at no cost to you!
2. Shop around!
Taking on a mortgage is a long-term financial commitment; therefore, it’s good to shop around to make sure you get the best deal for your personal circumstances. Remember to take into consideration:
Interest rates;
Down payment amounts;
Closing costs;
Early payment penalties; and
Other associated fees and costs.
3. Budget, budget, budget!
Before getting into the complexities of applying for a mortgage, map out your finances and determine what you can comfortably afford. Potential lenders may pre-qualify you for a bit more than you think you can afford. If this happens, set a budget that will not go over what you are comfortable with. For example, if you are able to pre-qualify for a total amount of $500,000 but you are only comfortable with a mortgage amount of $375,000, stick to that price when looking for your future home.
Extra Tip: It is commonly suggested that your mortgage payment be no more than 28% of your monthly income. For example, if your gross monthly income is $2500, then your payment should ideally be no more than $700. This will allow you flexibility to maintain expenses while saving and living comfortably.
4. Find a trusted real estate agent!
This step is important but sometimes overlooked by potential homebuyers. Real estate agents take away the hassle of searching through multiple listings by sending you options that match the description of what you are looking for. They also provide helpful neighborhood knowledge, including zoning restrictions. For example, if you are looking to purchase or build a duplex, an agent would know exactly which neighborhoods are best for your goal. Best of all, a trusted real estate agent will negotiate on your behalf and get you the best deal that your money can buy.
5. Prepare, prepare, prepare!
The mortgage application process can take some time, so it is important to be prepared beforehand. Many delays in the application and approval process are due to missing or delayed documentation. Before starting the process, speak to your future loan officer and request a list of items that you may need. Typically, you will need the following:
Identification – your passport is often required as the primary form of identification. You may also need your driver’s license and NIB card as secondary pieces of identification.
Job letter – you can receive this letter from your employer, and it should state the length of time at your job and your annual salary.
Pay stubs – most banks ask for pay stubs that reflect at least one month’s salary.
Bank statements – you may be required to provide bank statements that show the last 2 months of activity. This may be required especially for entrepreneurs.
Credit reference – if you have other credit facilities with other financial institutions, you will be required to provide a credit reference that will state your current standing.
Proof of address – this can come in the form of an official Voter’s Card or a recent utility bill under your name.
The above documents are just the beginning of what you will need to provide. Depending on your situation, you may also be required to provide:
A marriage license or a divorce decree;
A pension statement;
An NIB statement;
A mortgage statement (if you have another mortgage); or
A Home Owners Association Statement, if applicable.
6. Lawyer up!
Once you are ready to begin the actual application process, you will need to find a trusted lawyer who will perform the below functions for you:
Read through your contracts and agreements to ensure that they are in tip-top shape;
Complete title searches to ensure your desired property is being sold by the rightful owner; and
Hold your down-payment in escrow.
The costs of hiring a lawyer can be a bit steep, but it will save you unnecessary headaches and expenses in the long run.
7. Understand your costs!
The initial costs of taking out a mortgage are high, so you need to be prepared financially. Below are the usual costs associated:
Mortgage Payment: For most people, in order to purchase a home, they need financial assistance. If you acquire a mortgage, there will be a fixed monthly payment to your lending institution;
Closing costs: This includes the down-payment on the cost of the home, usually ranging from 5 to 20%, legal fees, the realtor's commission, government stamp tax, and VAT charges on the applicable services;
Property taxes that are charged on the value of your home. Depending on the value of your home, you may qualify for an exemption;
Homeowners and life insurance: These are mandatory to acquire a mortgage, and are based on the value of your home; and
Ongoing condo or homeowner association fees, if applicable.
Once the above items are taken care of, the application process should go smoothly. If you are ready to start this journey, GET MONEY SMART by utilizing these tips to help you along the way.