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A Prospective Homebuyer’s Guide to Housing Loans

Did you know that the demand for housing loans grows at a rate of 20% every year?

Owning a home is every Filipino’s dream. It is the ultimate security blanket. However, not all Filipinos are capable of a one-off payment. Most people resort to obtaining a housing loan since it is the only way to get hold of their dream home. A housing loan is 100% okay, but you, as a prospective homebuyer, need to understand the process before you dive right into it.

Buying a home can be a time-consuming process. This housing loan guide in the Philippines tackles what every future homeowner needs to know.

Housing loan guide in the Philippines

What is a housing loan?

A housing loan is a financial instrument used to fund any or a combination of the following purposes:

Other purposes may include the purchase of the lot or condo and construction of the physical property or renovation of an existing house.

A housing loan is completed or settled once the borrower has repaid both the principal and interest.

In the first few years of the housing loan, the majority of the monthly repayments goes to paying the interest. In the next few years, to the principal.

What are the housing loan options in the Philippines?

Several factors may affect your decision to avail a housing loan. Regardless though, you have three options: Pag-IBIG, banking institutions and in-house financing.

Pag-IBIG housing loan

Home Development Mutual Fund (HDMF) or simply Pag-IBIG provides a housing loan instrument for all its qualified members. Availing a Pag-IBIG housing loan is already discussed here wherein few prerequisites and processes are involved.

The PAG-IBIG housing loan is open for all salaried, self-employed and OFWs up to the age of 65 years old.

Banks housing loan

Majority of the banking institutions in the Philippines offer a housing loan. Nonetheless, the instrument including its requirements, loanable amount, interest rates, and loan tenor generally vary from bank to bank.

Direct from real estate developers

Also called in-house financing, real estate developers make available housing loans to their prospective buyers. In-house financing prescribes shorter loan tenor (up to 5 years) compared to banks and Pag-IBIG.

Who are eligible to apply for a housing loan?

Several factors affect the eligibility of a borrower including qualifications, income, age, credit standing, and employment. The financing institution needs to establish the stability and continuity of the borrower’s occupation. Other factors to consider are spouse’s income, number of dependents and assets and liabilities.

At its most basic, working or self-employed Filipino residents aged between 21 and 65 years old are eligible to apply for a housing loan.

Overseas Filipino workers (OFWs) may also apply for a loan with special documentary requirements such as a special power of attorney and POEA-approved (Philippine Overseas Employment Administration) contract and certificate of employment (COE).

A joint housing loan with your husband is possible. This increases the chance of getting approval wherein your spouse’s income will be evaluated together with yours. The combined gross family income and other such factors will be looked into.

If not a spouse, you can still apply for a housing loan jointly with a co-borrower. Standard requirements and procedures apply, though.

What are the requirements?

Based on the above, the institutions shall seek the following documents:

How to apply for a housing loan?

Before you may apply for a home loan in the Philippines, there are certain aspects to look at first.

Credit score

Applying for a loan with a low or poor credit score is a bad idea. If you learn that your credit score needs a cleanup, do it. Secure a copy of bank statements and credit card statements to determine if there are any late payments, defaults, etc. Scrutinize the reports to find opportunities to rebuild your credit score.

Do this before you even apply for a housing loan especially from a bank. Banks look into this detail. In fact, this is a critical determinant of the approval or rejection of the housing loan application.

While at it, it is not advisable to apply with multiple banks. It would be best to apply to the banks accredited by the developer. In some cases, the bank offers home loans to long-standing clients first. The loans often have exclusive benefits that you may take advantage of.

Loanable amount

Financing of the property is up to 95% of the TCP. Consider several factors including your qualifications. Determine first if this amount would suffice or you need a higher amount. In some cases, if it exceeds, bargain for a lower loanable amount for easier payback.

Ask what fees and charges will be deducted upfront to the amount to be loaned to you. Loanable amounts from both banks and Pag-IBIG vary, from Php200,000 to Php2 million for the former and 100% of the amount if the property costs Php400,000 and below, 90% for properties that cost between Php400,000 and Php1.25 million, and 80% if the property costs more than Php1.25 million.

Interest rate

The low-interest rate must not be your primary measure in securing a home loan. Instead, check online comparison websites to determine you are getting the deal that you can truly afford. Remember that interest rate goes hand in hand with the loan term, which should be on top of your considerations too.

The most proactive thing to do is go for a housing loan with the longest fixed-rate period that you can treat as a threshold. This minimizes the risks of subjecting the mortgage to interest rate fluctuations. It also means more positive cash flow for you for at least within that period because you know how much to pay for the equated monthly installments (EMIs).

Loan tenor

As mentioned above, housing loan term (or tenor) is the entire period wherein you need to pay the loan, interest charges applied. Pag-IBIG offers up to 30 years loan tenor.

For banking institutions, it generally varies although you have sole control over this area. You get to decide between 3 and 25 years.

There are pros and cons to both short and long-term housing loans. Monthly repayments are higher for short-term loans but with lower interest charges. With a long-term home loan, you get to spread the monthly payments, but you need to bear the higher interest charges.

Capacity to pay

The last statement brings us to this aspect – one’s ability to pay. Even Pag-IBIG advocates a loan entitlement that is limited to an amount not exceeding 40% of the net disposable income of the member. It means you are capable of paying an amount that is only 40% of your net monthly income.

To avoid defaulting on monthly amortizations, you may want to determine the amount you are capable of paying on a monthly basis. Work backward by calculating the 40% of your net disposable income before scouting a property that you want to avail under a housing loan. That’s the amount that you can comfortably pay throughout the loan term.

Mortgage insurance

For security, some banks require a mortgage redemption insurance (MRI) to cover the amount payable in case of disablement or death. Lenders provide this at the time of signing the loan contract, payable one time or on an annual basis.

How long is the processing time?

The bank’s guidelines for processing housing loans range from five to 15 working days, given that all requirements are ready. Pag-IBIG pegged the processing at about 20 working days.

This does not include the days spent preparing the documentary requirements.

Can I be denied to avail the housing loan?

All the factors mentioned above will influence the institution’s decision to extend a housing loan to you. If you met all the criteria, there is no reason for the bank or Pag-IBIG to deny or reject your housing loan application.

A housing loan application can be possibly rejected for various reasons such as:

Again, your capacity will also depend on the stability and continuity of your occupation. Other factors that the institution will investigate are the number of dependents and credit score.

How much can be borrowed?

It varies from bank to bank as well as the appraised value of the property. However, banks can provide up to 95% of the property’s assessed value; it’s the loan-to-value (LTV) ratio. Banks offer a minimum amount of Php500,000 although 5% down payment is required to minimize the risk of non-payments.

Pag-IBIG lends borrowers between Php600,000 and Php6,000,000 depending on the qualifications of the member.

In the Philippines, availing a housing loan is subject to the principle of margin of finance. It refers to the loan-to-value ratio. The current assessed value of the property is important to determine the ratio.

For example, if a property’s assessed value is Php1 million, you are entitled to borrow up to 80% of this value. That means the available loanable amount is Php800,000. You need to shoulder the Php200,000 as a downpayment. The downpayment is usually 20% of the appraised value of the property.

What are the applicable interest rates?

In the Philippines, financial institutions offer conventional housing loans to borrowers. These are home loans with a fixed interest rate so that the repayments will be predictable. It can be anywhere from 6.5 to 12%. It is fixed in the first year, first two or five years depending on the agreed period. After that period is exhausted, the interest rate will be repriced based on the prevailing market rate.

Interest rates offered by the banks vary, starting from 4.99% to 6% per annum. Pag-IBIG housing loan’s interest rate is at 5.5% per annum with an opt-out option for the first year of the loan (applicable to housing loans of up to Php6 million).

The interest rate is paid along with the equated monthly installment (EMI).

Nevertheless, in a conventional housing loan, the interest rate is fixed throughout the loan tenor. This is perfect for homebuyers looking for a predictable payment pattern. The other type is the flexible housing loan with which interest rate will depend on how much the borrower will pay for it every month.

Other things to know about availing a housing loan in the Philippines

This housing loan guide aims to discuss everything a prospective homebuyer needs to understand in buying his or her first home. Should you have more questions about the process, please leave a comment below.

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