Sources of Financing

The many sources of financing include:

Banks - The most common source of financing for homes, most banks have a separate division that takes care and processes loan applications. Extensive paperwork and documentation is required before any amount of loan is released.

Financing Institutions - Less formal than banks, you may obtain financing from lending institutions. Be aware though that not all of them have a facility for a real estate mortgage.

In-House (Seller Held) - In-house financing is common for big developers in which they have their own financing facility for their projects. In buying a home from them, you may choose to buy in cash, thru bank, or thru in-house financing. In buying property from individual owners, you may also negotiate for a seller held financing. The seller may agree that you pay in installments depending on your agreement.

Personal Loans - Filipinos help each other when in comes to big purchases especially real estate. You may ask the help of your parents, brothers and sisters, relatives and even friends. Make sure that you have a clearly written payment agreement for many relationships and friendships had been strained due to misunderstandings in the handling of personal loans.

Borrowing from the Bank Although there may be many sources, understanding financing from the banks is important since this probably will be the route that you will choose.

Understanding Interest Rates Housing mortgages are usually paid in equal monthly installments at a pre-determined amount of time. When the bank tells you that the interest rate is 10 percent, it means that you will pay interest based on a diminishing balance scheme in which for every payment that you make, a part of it will pay the principal and the remaining will serve as the interest for the loan. Interest payments are larger at the start of the loan and gradually 'diminish' towards the end of the term as principal payments become larger.

Whenever you borrow money from the bank, they will look at the different C's so make sure that you understand them clearly. The C's are:

Character - This is the way you are and the way you live as a person. When they conduct a character check on you, they look at your background, what type of work that you do, etc. The banks look at your integrity and honesty in dealing with your obligations.

Credit Rating - This is your previous record on whether you have availed of credit in the past. There is a check if you have paid every obligation diligently and on time. Defaults in loan payments, credit card bills, and other obligations will be detected and can gravely affect your ability to access a loan. Make sure that you pay your bills on time so when the time comes for you to borrow a large amount to finance your home, you will have a healthy credit rating.

Capacity to Pay - Your income is checked to make sure that you have the capacity to pay the required amortization amount. Your gross income is calculated and your living expenses are deducted. A certain amount of your monthly savings may be allowed to cover the monthly payments on your loan. The type of employment or business that you are in is also considered in assessing your capacity to pay.

Collateral - This is the loan value of the property that you are using as collateral to get your loan. Remember that the maximum amount of money that you can borrow is limited by your capacity to pay and the loan value of your property. Banks follow a set of standards and procedures when it comes to appraising your property.

Documents about the Borrower Documents about yourself as the borrower are necessary to assess your character, integrity, capacity to pay and credit rating. These include:

Application Form - You disclose personal information on this form including your salary and that of your spouse. Your finances are also listed and tabulated and the net amount of disposable income is arrived at. Together with the application form, you should supplement the bank with information that will help them assess fully your character and capacity to pay. These documents include:

• Certificate of Employment - You can get this from the HR department of your company. The details of your service specifically your salary and the length of time that you have been with the company are written in the certificate.
• Income Tax Return for the last 3 Years - Banks require that you present your tax return for the last three years. This is an indication that you are gainfully employed or have a business that is legitimate and is making money.
• Bank Statement - The lender looks at your cash flow. Bank statements and copies of your bank account are to be submitted to your lender for evaluation. The movement of money in your account determines how you earn and use money.
• Pay Slips - Pay slips may be required just to see how much net income you get per month. Salary loans and deductions are reflected in your pay slips.
• Business Papers - If you are a businessperson, the registration papers of your business may be required.
• Statement of Other Income - If you have other sources of income, you state this in your application so that your total capacity to pay is properly evaluated.

Lenders would require detailed information on the property being presented as collateral for a loan. Documents to be submitted to the bank include.

Title and Tax Declaration - The title and tax declaration is a proof of ownership of the property that you are offering as collateral. The lender will check the authenticity of the title with the Registry of Deeds. Liens and encumbrances against the property are annotated in the title.

Lot Plan and Location Plan - The Geodetic Engineer surveys the lot and places the monuments that define the boundaries. The lot plan is a diagram showing the orientation, dimension and shape of the lot.

Detailed Plans and Specifications - If you are applying for a construction loan, the detailed plans and specifications are very important for the lender in order to assess the floor area and finishes of the house that you intend to build.

Cost Estimates - The bank representative verifies the estimate of the costs. This is gradually checked as the construction work progresses.

Bill of Materials - This is a list of all the types and quantities of materials that are to be used for the project.

Banks appraise the property either thru their own personnel or thru a separate appraisal company. There are different methods on how to value your real estate property. Based on the lending policies of the bank, there is a maximum value of loan that can be taken out based on the appraised value of the property.

Appraisal of real estate is used in many ways. These include:

Purchase and Sale of Real Property - When a property is being bought or sold, appraising its fair market value would give an indication on how much it would be traded in the open market.

Obtaining Financing - In obtaining a loan from a lender, the property being tied up as collateral is appraised based on the lending policies of the lender.

Partition of Property - When a property is being divided, the appraisal value is used to ensure partitioning of land among its beneficiaries.

Expropriation - When the government is expropriating a piece of land, the appraisal process would determine a fair amount on how much the government should pay the landowner of the property being expropriated.

Market Data Approach - The property is compared with other properties and its value is assessed based on the value of comparable properties. It is based on the principle of substitution and that no knowledgeable buyer will pay more than what it will cost him or her on an equally desirable substitute property.

Replacement Cost Approach - The cost of building a similar property is calculated. The concept of having a 'replacement' for the property is analyzed. The appraiser is well versed with the latest prices of materials and labor so that an accurate value of reproducing the structure or property is established. Most of the time, persons doing the appraisal are trained and educated in architecture or engineering.

Income Value - The income that can be derived from a real estate investment is assessed and compared with the financial objectives of the investor. The objective of the investor is to receive a financial return on the land and on the improvements.

Depending on the policies of the lender and the type and amount of loan that you are applying for, all or just some of the documents listed above may be required. The main purpose of submitting the necessary documents is to convince the bank that you are credible and capable of paying for the loan that you would intend to borrow.

If you are thinking of borrowing to finance your home, it is best that you are honest about what you need, what you want and what you can afford.