May be the first question we should answer is, SHOULD YOU TAKE A MORTGAGE LOAN?
Well, I do not have a yes or no answer for you. It is a choice you need to make on your own. However, I think it is more an issue of not feeling comfortable managing debt. It is about knowing the difference between good debt and bad debt. According to the Rich Dad Advisors (Secrets of Successful Real Estate Investing), “with leverage, you use other people’s money to build assets…”
It seems to me that you are on the right track, once you have considered the title to the property, the location of the property, the price of the property, the rent income yield potentials of the property, the interest rate on the mortgage loan, the tenor of the mortgage loan and your debt service ratio or repayment capacity
We need to be on same page on the meaning of the subject (mortgage). A mortgage loan, also referred to as a mortgage, is a loan given to and used by an obligor, to purchase real property (a house). The loan is secured with the property financed. It is a loan to finance the purchase of real estate , usually with specified payment periods and interest rates, with the borrower (mortgagor) giving the lender (mortgagee) a lien on the property as collateral for the loan. The mortgagor’s lien on the property is discharged when he mortgage is fully repaid. .
A mortgage arrangement has the unique benefit of being able to satisfy both parties to the credit contract; the bank can be comfortable in the fact that the credit risk is mitigated by its charge on the mortgaged property, while the borrower is assured that he has a right of redemption, as he keeps to the terms of the mortgage.
We will examine the various forms mortgages may take, in practice.
- Mortgages to the Employed. The qualified obligors in this category are those employed by institutions or corporate organization, from where they earn regular, ascertainable income that can be domiciled with or in any form charged to the bank providing the mortgage.
- Mortgages to the Self-Employed. Those in this category also earn income, except that such income may not be as regular or ascertainable as those of the employed.
- Home Re-Finance. Where this is available, the obligor is granted a loan in the form of a re-finance for an already purchased property.
- Real Estate Finance. This is a type of commercial loan, usually to developers or other such obligors to fund real estate projects. This is really not in the classical form of a mortgage.
Now, let us run through some of the factors considered by the loan analyst, depending on the obligor category or loan type:
Mortgages to the employed
- The obligor’s capacity for repayment is assessed principally by reference to his monthly salaries and allowances earned from his employer. This is considered both as a basis for taking a credit decision to grant the mortgage and for deciding how much to grant.
- Closely related to the foregoing criterion is the factor of the stature and goodwill or rating of the employer of the obligor. In practice, most banks prequalify certain organizations whose staff are eligible for mortgages or any such loans.
- The other factors analyzed are the Debt Service Ratio (DSR) of the obligor, his or her age and the location of the property sought to be financed. We have already extensively discussed the factors that prudent investors consider in making a choice of any real estate to invest in. The banks are even more circumspect. They consider all and more (property with registered title, the value of the property, whether the property is a realizable collateral security, etc). Usually, an equity contribution is required from the obligor. The percentage varies.
- Now that I have mentioned collateral security, we need to highlight the related processes: search report to ascertain the residence and status of title; inspection/valuation to verify its location, assess its physical condition and value (OMV & FSV); unimpeachable documentation; the property is insured and all the documents required for perfection of the assignment and mortgage are obtained , to enable the bank perfect
- Where a bank grants a mortgage to an obligor who is self-employed, all the factors are analyzed (capacity for repayment/regularity of cash-flow, the property with registered title is preferred, the age of the obligor , the value of the property relative to the obligor’s cash-flow or capacity, etc) . The big difference is in convincing the bank that the self-employed mortgage loan applicant has the capacity and character for repaying the loan as structured, because of the unique nature of such cash-flows.
- In most cases, the equity contribution required from the self-employed is higher than what is acceptable from an obligor who is employed in the institutions within the bank’s risk acceptance criteria.