There are various ways to finance your home purchase, with certain pros and cons to each, but there are tried-and-tested ways to receive a loan for your dream home that would not burn a hole into your pocket.
Although it is recommended to choose a financing method according to your own credit history and financial capacity, bank financing lords over other methods, primarily because it offers much lower interest rate and, in turn, lower monthly repayment.
The Difference between Bank Loans and In-house Financing
A bank loan is basically the amount of money (with collateral security) that is loaned by a commercial bank to a borrower with interest rates that are paid over time, provided that certain criteria for the loan applications are met.
In-house loans, on the other hand, are more prominently used in the automobile industry but are now becoming increasingly popular because of their simpler application process. A real estate developer basically does the job of what banks do by lending their clients’ money to buy their property. This eliminates the need for a third-party lender (i.e., a bank) and makes the transaction strictly between the homebuyer and the real estate company.
The Advantages of Bank Loans over In-house Financing
One advantage of a bank loan over in-house financing is the more affordable interest rates, which at the moment are quite low given the Philippines’ robust economy. As one of the Philippines’ largest and most trusted commercial banks, Metrobank makes sure that Filipinos can finally become homeowners by offering fixed-interest rate loans. This definitely benefits homebuyers because even if interest rates increase, they do not have to worry about theirs going up as well.
Repayment is also more flexible with bank loans, as commercial banks can offer loan tenors up to 15 years or more. Lastly, bank loans can be used not just to purchase a new or resale property—the borrowed amount can also be used to finance the purchase of a residential lot and the construction of a house, or even the renovation of an existing one.
On the other hand, developers’ in-house loans are generally more restrictive when it comes to the purchase, the loan tenor, and the interest rate. Almost always they are exclusive to the developer’s pre-selling projects. Developers also offer much higher interest rates, and the loan tenor is usually shorter.
However, one of the most commonly cited downsides of bank loans is that the application process and approval are much more stringent. But with enough knowledge and preparation, homebuyers can reap the advantages of bank loans.
Steps for Applying for a Bank Loan
The first thing every loan applicant must do is to get prequalified and know his or her eligibility. This entails the assessment of assets, monthly and annual income, and projected down-payment, among others. One of the best ways to start is to clean up one’s credit history, especially credit card debts, before starting the application.
Prequalification is an important step because it gives the borrower a rough estimate on how much he or she will be able to borrow. Eligibility, on the other hand, simply means knowing if one is suitable for a bank loan. To take Metrobank’s terms as an example, its qualifications for eligibility are the following:
- At least 21 years old at loan application and not older than 65 years old upon loan maturity
- Filipino citizen.
- In case of a foreigner, the applicant must have permanent resident visa
- Self-employed or a fixed-income earner
- Employed for at least 2 years with current employer
- Earning at least Php30,000 (for self-employed individuals), or have the same gross monthly family income for fixed-income earners
- Overseas Filipino workers (OFWs), especially those who are planning to invest in properties for their families left behind in the Philippines, are also extended special terms and considerations by Metrobank.
After prequalification, the applicant gets to the preapproval process, in which he or she must submit the following requirements:
- A completed application form
- Documents for identification (e.g., government-issued ID, company ID)
- Proof of income (e.g., income tax returns, latest pay slips)
- Proof of employment (e.g., certificate of employment from present company)
- Collateral requirements (i.e., Transfer Certificate of Title or Condominium Certificate of Title; tax declaration; contract to sell or reservation agreement; and house plans, bill of materials, or specifications if loan is for house construction)
Prequalification is an important step in the loan application process. Securing all these documents right away saves time. In addition, since the loan officer will take a good look on these documents, this process will be crucial as they will make or break the approval.
One final tip that loan officers offer to loan applicants is securing high-enough down-payment (usually at least 20 percent of the home’s total contract price), because this gives the bank or lender confidence in the borrower’s financial standing, and at the same time gives the applicant the chance to incur smaller overall interest rates with smaller mortgage repayments.
Although getting approved for a bank loan is more difficult than getting a developer’s in-house financing, the former is still better due to a number of reasons. First, loans offered by banks have much lower interest rates, which can be between 5.25 and 7.75 percent. In contrast, developers charge up to 12 percent interest for the loans they extend to homebuyers. And second, bank loans have also longer loan tenors (up to 15 years or more) and more flexible to payment terms. It is also not difficult to get an existing loan refinanced to take advantage of lower prevailing interest rates, especially if the borrower has already earned large enough equity on the property.
Furthermore, the most commonly cited downside of bank loans, which is the stringent approval process, can be easily remedied. Cleaning up one’s credit history, getting the entire requirements ready, and putting a considerable down-payment are tried-and-tested ways to get approved for a bank loan fast.
Future homebuyers can also seek the assistance of loan officers, whose expertise can guide homebuyers’ one step closer to their dream home.