The Ins & Out of Home Ownership
Whether you are buying your dream home, an investment property, or building generational wealth through the acquisition of real estate, homeownership is a major goal that requires a long-term commitment. Owen Ferguson, manager at JMMB Bank’s Knutsford Boulevard branch, urges individuals in the market for a home, to prepare their finances, as early as a year before approaching a financial institution to apply for a mortgage. “You only get one chance to make a good first impression and so you want to ensure that your credit history has no surprises and that where necessary, you take corrective measures where you have outstanding debt, as this can affect your loan application,” said Ferguson.
In explaining further he noted your credit history and overall debt-servicing ratio (that is, your monthly debt vs monthly income) will impact the amount a financial institution is willing to lend and the interest rate, therefore it is best to ensure that you are in the best financial health when you approach your financial institution. Here is a guide to preparing your finances for your homeownership journey:
• Check Your Credit Report: Individuals can request a free credit report from any local credit bureau, up to a year before applying for a mortgage. This allows you to have a clear picture of how you will be viewed by a potential lender when you are ready to access a mortgage. You also avoid unwanted ‘surprises’ such as outstanding debt that you have already repaid or any other inaccuracies that need correction.
Ferguson, also reassured individuals who may have had financial challenges or poor financial habits in the past that resulted in outstanding loans or poor loan servicing not to be deterred. “You can use this time to ameliorate any financial shortcomings by opting for a debt consolidation loan or a loan from family and friends to make your loan repayment more manageable and seek the advice of a financial professional to assist you to better manage your debt as you seek to take on more debt in the near term.”
• Track Your Finances: The financial expert also urged individuals to maintain a monthly budget, as a good financial tool for tracking their expenses and income, as this allows them to better determine the amount they can reasonably afford to pay for a mortgage after meeting all your other financial obligations (expenses). It also offers you the added benefit of being ready to provide this information as part of your mortgage application process as needed.
He also noted that tracking your finances is especially critical for self-employed persons or entrepreneurs. “Keep good business records of your finances, and one simple way of doing this is by utilizing a business account, such as the JMMB Smart Business account, and passing all income and expenses through this account so that there can be evidence of your earnings, even if funds are later withdrawn for daily operations and payments,” was the word of advice shared by Ferguson.
• Save a down payment Although some financial institutions may offer up to 110% financing, Ferguson advises potential homeowners to save a down payment of 10-17% of the property value. This allows them to cover professional fees without incurring additional debt, with fees such as a surveyor’s report and valuation report being upfront costs, which form part of the mortgage application. Additionally, having a down payment allows the potential homeowner to be proactive in taking advantage of opportunities and reduces their overall monthly mortgage payments during the life of the loan.
Ferguson also shared these additional nuggets with potential homeowners to help them to get on their way to making their dream of homeownership a reality:
Do Your Research: Explore the best option for financing your dream home or investment property by comparing financial institutions to determine which one suits your unique needs, therefore consider: processing time, fees, rates, service delivery and flexibility. He cautioned, “Look at more than the rates as financial institutions may offer a promotional rate, for a short period, but you have to bear in mind the rate the loan will revert to, as this is a long-term commitment that you need to manage all the way through.” Adding, “It is typically in the home buyer’s interest to opt for a variable rate mortgage that allows you to benefit from lower interest rates over the tenure of the loan. In the last five years, interest rates have moved from 11% to approximately 8.5%, with JMMB Bank currently offering rates as below 7%.”
An online mortgage calculator can also help you determine the mortgage monthly payments from each financial institution, however this serves as an estimate.
Get Pre qualified: “This will help you and the realtor to narrow your search so you are able to determine if you look for a property in a particular area or explore other options because of my budget,” said Ferguson. The prequalification process also prevents potential home buyers from missing out on great opportunities because of delays in the mortgage process or worse yet, disappointment when you later realize that you do not qualify for the amount needed to finance the property of choice.
This process will involve sharing relevant documentation about your financial circumstances: proof of income (job letter and/ or last three months’ pay slips); financial statements and tax returns for business owners/ entrepreneurs and non-resident applicants, along with personal information such as: national identification; tax registration number (TRN), proof of address, birth certificate and consent for your financial institution to request your credit history.
Although your prequalification letter is not a guarantee of getting a loan with the financial institution, it serves as a good estimate of the amount the institution is willing to lend you and helps to kickstart the mortgage application process. Prequalification letters are usually valid for 3-6 months, provided there is no major change in your circumstances.
Start House Hunting: You are now ready to start house hunting, and a great place to start is with the help of a professional realtor, even as you explore online sites for potential property options. It is also a good idea to have your own checklist of your needs and preferences in selecting your home based on whether it will be your primary residence or investment property. “Feel free to go to several open houses and compare homes before making a final decision, to ensure the house you select meets your needs and the intended use,” advised Owen.
Make an Offer: Having selected your property of choice, you can put in an offer to the vendors, for consideration. At this stage, you want to use your negotiation skills to get the best deal from both the vendor/ seller and your banker about offering special terms and conditions.
The banker also explained, “As you prepare for the final stages of the homeownership process be prepared for the short-term and long-term fees that are a part of the process.” In walking through the related fees associated with purchasing a home, he shared that the deposit/down payment will need to cover: upfront costs such as: surveyor’s report; stamp duty; legal fees; valuation; bank processing fee; property insurance; and closing costs - in the case of new developments which may be subject to escalation. The majority of these costs can be financed as part of your mortgage, subject to your debt serving ratio, or supplemented by an unsecured loan. Additionally, if you uses NHT benefit, you can access an additional 5% of this loan amount as a buffer to offset some of the costs.
The average mortgage processing time is 30-120 days, after the submission of all documentation.
Even as you celebrate this milestone, Ferguson encourages individuals to maintain an emergency fund and manage their budget in order to cover new financial obligations such as property tax and maintenance and pursue their other dreams without feeling burdened by debt. You should also insure your property, after all, it is a major investment.