Mortgage: Do’s and don'ts for first-time home buyers

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Buying your first home can be an exciting step. Though it signifies the start of financial freedom, it can also be nerve-wracking. However, housing prices, despite falling during Covid-19, are still 4.4 times higher than in 2000.

The average price of a one or two-bedroom residential property, according to HassConsult, is Sh14.4 million, while a four to six-bedroom residential property goes for Sh39.1 million.

Property investors can, however, take advantage of the mortgages at affordable housing finance schemes.

Mary Ndirangu has been a mortgage and property advisor for five years with a leading commercial bank.

She shares tips and tricks that can help you navigate your first home search and mortgage application.

What entails a mortgage?

Think of a mortgage as a loan on the property you seek to buy, where a lender offers you cash upfront.

The borrower then pays for the property using it as collateral. The difference with other loans is that a mortgage is long-term and can go up to 25 years.

Be aware of mortgage perceptions, but don’t knock it.

You are likely to come across some of the negative perceptions around mortgage products because the process is more complex than a regular loan.

The turnaround time is much longer than other facilities such as personal loans, and people find it tedious. Depending on the property you want, the vendor may push you to make payments while your mortgage is still being processed and end up losing to another buyer.

Secondly, the cost of getting a mortgage is higher than other loans because of costs.

Regardless, taking a mortgage has its upsides. No one wants to pay rent forever. If you calculate how much you spend on rent yearly, you may find you could be able to buy a house in five years with the same amount

You are not too young

Everyone should take that initiative as early as possible to buy a house. As long as you have an income, you should consider taking out a mortgage if you don’t have ready cash.

Ideally, you do not want to struggle to pay for a mortgage when you’re older. You need not worry about what may happen during an emergency as we saw during the pandemic, whereby you cannot repay the loan.

You have the option to approach the bank and explain your situation. For instance, if your business has been affected by the pandemic, the bank will give you a moratorium (grace period) or agree on a lower amount you can pay until things get better. However, this is on a case-to-case basis.

Do extensive research

Choose everything from a real estate agent and the property you’re interested in carefully.

It is no surprise that most fraud cases have to deal with land and property. When finding the house you want to buy, use reputable agents from referrals by other recent home buyers.

Go further to interview at least a few agents and request references. Extend that with due diligence to the property you pick. Say you want to buy an off-plan property where the structure has not been built but is cheaper and one is promised that the project will be done at a certain time.

Do not just take the vendors’ word for it and start paying deposits immediately. Find out if it is genuine property.

Do enough research around the property you want as well, in terms of affordability. Think about your long-term needs if you may want to expand your family.

Consider if you want to live in apartments that are cheaper but offer less privacy. Then compare the price with the same property in the market.

Don’t forget to save for closing costs

Sometimes you go in for a mortgage without being aware of the additional costs that are not covered. These are the closing costs, paid out-of-pocket and are typically three to four per cent of the purchase price.

Your lender should give you a specific number upfront so you know exactly what to bring on closing day. These include processing fees, insurance for both the property you are buying and for yourself as the borrower, payments for valuation, as well as legal fees for the lawyer doing the transfers.

On the bank’s side, stamp duty is the highest charge in a mortgage.

Tackle saving for your closing costs and down payment as intensely as you would when building an emergency fund.

Shop around for a low rate

Don’t just accept the first offer on the table. A seemingly small difference in mortgage rates can save you millions of shillings throughout a 25-year mortgage period. The rates of different banking institutions are close or similar as all banks are regulated by the Central Bank.

However, there is a slight difference with the lowest rate being 12.2 per cent and the highest at 15.1 per cent. Additionally, find out if the organisation you work for has a pact with banks as the rates on offer will certainly be cheaper.

As for negotiating for lower rates, it may be difficult for first-time buyers but an advantage to customers such as platinum clients or those who have been banking with an institution for a long time who stand to get better rates.

Your credit score matters

When you’re applying for a mortgage facility, the bank will visit your Credit Reference Bureau (CRB) report.

They will look up at your borrowing history in all banking institutions, the loans you have paid up and the ones you have defaulted on before, and if you have facilities with other banks.

If the income you have cannot service the facilities already taken up, then the mortgage process will not proceed. The CRB is updated continuously.

If you pay up your defaulted loans, you will be removed from the CRB blacklist.

After the initial default status has been regularised, you can proceed with the mortgage process.

Get your documentation in order

When you identify the property, the vendor should give you an offer for sale detailing the amount per unit, payment details, the deposit amount and how many days you need to clear the balance.

You will then get an offer letter, and a copy of the lease. At the bank, you will need to fill out a loan application.

All other documentation you need is your National Identity card and your Kenya Revenue Authority (KRA) pin.

 If you are employed, they will need your payslip for the last three months and your bank statements over the last six months.

They may also require a letter from your employer stating the terms of your employment and your job title.

In terms of closing costs, the bank should prepare an excel document for you to go through, which you should acknowledge and sign to show that you have understood everything you need to cater for during the process.

Determine how much you can borrow

Your income is the key determinant of the amount the bank will give you. If you are working, you will need to provide your payslip. If in business, then offer your audited books of accounts.

The bank will then advise you based on your monthly income on how much you can be given - factoring in the ‘one-third rule’ of living expenses.

The rule says that no more than one-third of your gross monthly income should go toward debt payments, including housing.

Once your income has been established, a mortgage calculator is used to compute your monthly repayments.

Avoid mortgage broker

A few years back, banks were receptive to agents. The agents would link borrowers up with a bank to access the mortgage facility. That brought about fraud as people were using fake payslips and other documentation.

Since then, banks no longer accept facilities from brokers or agents. It is advisable to go directly to a mortgage department at a bank to get the advice you need directly.

Expect a few hassles before closing

Be on your toes in the mortgage process. Track the process because sometimes it can be slow, especially when it goes to lawyers.

Follow up, to know what is going on, when you are required to sign documents or make payments.

It may take months to finish one part of the process. For example, if you do not have legal fees you may have to wait until you get them for the rest of the process to continue.

Finally, do not pay the deposit before your loan is approved. Tell the vendor you are working on your financing.

Go to the bank and apply for your mortgage. Once it is approved and given an offer letter, feel free to pay for the down payment.

Do not start the buying process because sometimes, you may not be reimbursed the full amount in case your loan is rejected.