The increasing demand for home ownership over the past two to three years, coupled with the heightened activity within the construction, financial services and real estate sectors, have created a virtual ‘feeding frenzy’ among the players in the housing market. This as they all seek, and quite rightly so, to capitalize on the country’s current economic windfall.
In the midst of this frenzy however, homeowners, in their desire not to loose the opportunity to acquire their dream home, must be mindful of their own limits. They must be mindful that the mortgage facility would probably be their most significant, long term loan commitment. That being the case, due care must be exercised in making the commitment.
1. Pay attention to your credit-rating/profile
Unfortunately many persons still do not understand the impact of poor credit history on their ability to obtain future financing. A poor credit history is one which reflects among other things, missed and/or late payments of the monthly installment on existing and/or previous loans. A credit profile that is also characterized by frequent borrowings or attempts to borrow can also adversely affect one’s ability to readily obtain mortgage financing. Such information which is available to all subscribers (i.e. Banks and other Financial Institutions) of the Automated Credit Bureau, is critical to the decision as to whether or not a mortgage loan should be granted.
It is therefore imperative that potential homeowners ensure that their credit history/profile is such that it would boost their eligibility for mortgage financing. This means that, not only should they make timely payments on their consumer loans, but also the very often neglected credit card payment. It would be of even greater value to consider paying down any outstanding balances on your credit card.
2. Obtain pre-qualification or pre-approval before making a down payment
While it is more desirous that pre-approval is obtained prior to signing your agreement for sale and paying your deposit on your new home, it is equally important to ensure that you are pre-qualified by your financing company for the mortgage that you are proposing to secure.
This safeguards the prospective purchaser from contracting to purchase a property for which he/she may not qualify for the appropriate level of financing, and running the risk of loosing his/her deposit.
Pre-qualification is particularly recommended where the mortgage to be granted is for construction purposes, as this would guide home-owners in their discussion with their building contractors as to the size and stature of the building to be constructed.
3. Borrow only what you need
Most persons, when taking a mortgage seek to borrow as much money as possible in order that they can minimize the amount of the deposit that they would be required to pay. The result however, is that it would take a longer time to enjoy the benefit of any significant equity in the property and interest costs would be that much higher.
There are also those who expect that their incomes will eventually increase thereby making their payment of the monthly installment more comfortable and affordable. The reality is however, that most first time purchasers under-estimate how expensive homeownership can be, more-so if they were previously renting or living with relatives. Payments in respect of property taxes and insurances, higher utility bills and repairs and maintenance just to name a few, would now be payable in addition to the mortgage installment.
The maximum mortgage installment should not exceed 33.3% of gross monthly income. Many financial advisers suggest however, that limiting your housing costs (i.e. mortgage payments, property taxes and homeowners insurance) to 25% of gross income, is much more sustainable and provides for a better cash flow position. In addition, a significant mortgage installment leaves fewer funds available for the achievement of other financial and personal goals.
4. Plan for closing costs
Budgeting for closing costs is often omitted in the consideration of the total cost of home acquisition. These costs typically include legal fees and charges, (the most significant of which would be stamp duty in respect of the Deed of Conveyance), prepaid home-owners insurance and other property taxes, and where required, mortgage indemnity insurance.
It is therefore advisable that you plan for your closing costs, and ensure that you have the cash available for such payments when they become due. Your mortgage lender should provide you with an estimate of these costs. As a general guide however, closing costs can range from 5% to 7% of the loan amount.
5. Ensure some cash is available after closing the mortgage
If you spend “every last penny” to pay closing costs, there will be nothing left for those costs that you did not anticipate previously, like the need to install a water tank and pump.
It is for this reason that financial planners advise, that first time homeowners should try to have at least three months’ reserves, i.e. the equivalent of three months worth of monthly expenses available after closing. Admittedly this may be difficult if not impossible for most salaried persons to achieve. However, such a strategy would help to handle the additional costs that come with home ownership with much less stress.
Applying for a mortgage is not an everyday event. For this reason, those who undertake this life changing opportunity may be daunted by the cost, the paperwork and the time that it takes to complete the process. It is therefore important that as far as possible these simple yet critical areas are addressed, so that the decision to acquire a home can be the truly rewarding experience that it is intended to be.
By: Gillian C. Caesar,General Manager, Mortgage Services
Trinidad and Tobago Mortgage Finance Company Limited