Home Financing Basics

Home Financing Schemes

Affordable home financing is important to potential home buyers to ensure that mortgage payment are not compromised. Learn the the available options and the relevant distinction between bank financing and in-house financing. Find out more about the pros and cons of each to aid you in making the proper decision depending on needs and capacity.

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Bank Financing

Loan vs Mortgage

Loan and mortgage are two distinct concepts though many interchange the use and meaning of both. A loans is a type of debt where a person (debtor) owes money to a lender with a promise to pay at a later date, usually with interest. It may be secured with a collateral or not.

On one hand, a mortgage is a loan secured by real property and evidenced by a security instrument. A mortgagor transfers to the mortgagee an interest in the real estate which serves as the security or collateral for the payment of debt. This instrument creates a lien on the subject property as protection to the interest of the mortgagee (lender). Despite this, the mortgagor still retain full ownership over the property. Nevertheless, the mortgagee has the right to sell the secured property by foreclosure in case the debt remains unpaid after the lapse of a certain period of time. Home financing through a bank is commonly referred to as a 'mortgage' with the subject property, in this case a house becomes the collateral.

Bank Financing Pros

1. Lesser Interest Rates

The rates often charged by banks may be lesser than in-house financing by developers because banks as financial institutions enjoy the benefits of the economies of scale. But also remember that banks often offer fixed interest rate for a period of 1, 5, 10, 15, 20, or 25 years with repricing rates so factor this in when you are making a decision.

2. Transfer of Property Ownership to the Buyer

Home financing through a bank would mean that the the ownership of the house is already transferred to the buyer. It is the buyer now who mortgages the property to the bank or financing institution.

Cons

1. Processing of the application may take longer.

2. Higher equity at 20- 30%

3. Stringent documentation requirements

Banks often require the submission of numerous documents. You need to set an appointment with a bank account officer in-charge of housing loans and inquire about the necessary pre-processing documents. It would be advisable to shop around for the best deals you can get by getting as much information about the interest rates and terms being offered by different banks. Common documents required by the banks include the following:

  • Duly accomplished application form (include proof of identification and photos)
  • Proof of income (Income Tax Return, Certificate of Employment)
  • Collateral documents (Copy of the property title, tax receipts, property vicinity map)

In addition, there are fees processing fees as part of the application. Make sure to submit only photocopies of the documents being asked and keep the original. To make processing faster, submit all the necessary documents.

In-house Financing

The Pros

In-House Financing means that the payments to the house is through a loan taken from the property developer.

1. Faster Processing Time

In-house financing could be processed faster as compared to taking a loan from the bank.

2. Less Stringent Requirements

The developer might ask for lesser documentary requirements than a bank. Once the required reservation fee was paid and the list of documents required are completed and in order, it won't take much to get a feedback.

3. Lower equity

The required downpayment is usually lesser, at most 10% of the total value of the property

Cons

1. Higher Interest Rates

The property developer will most likely charge higher interest rates than the average rate being charged by the bank. The rates may also depends on your equity -- the higher the equity, the lower the interest rates.

2. No transfer of ownership

Under an in-house financing scheme, ownership of the property will only be transferred to the buyer upon full or complete payment of the total amount loaned.

Whatever your choice between the two, it is important to assess and weigh your capability to pay. The assessment should include determining all income, assets, liabilities and other expenses. Ensure also sure that you can afford the debt or mortgage payments without compromising your lifestyle in the years to come.

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