Mortgage tips for first-time home-buyers

 

Title Deeds show the ownership in addition to rights [Courtesy]

Buying your first house is an exciting step.

It signifies the start of financial freedom but it can also be nerve-wrecking. It is a fact that housing prices, despite falling during the ongoing Covid-19 pandemic, are still 4.4 times higher than in 2000. The average value of a one to three-bedroom residential property according to HassConsult, is Sh14.4 million, while the average price for a four to six-bedroom residential property is Sh39.1 million. Property investors can however take advantage of mortgages as affordable housing finance.

Mary Ndirangu has been a mortgage and property advisor for five years with a leading commercial bank in Kenya. She shares some of the tips and tricks to help you navigate your first home search and mortgage application.

But first, what is a mortgage? Think of a mortgage as a loan on the property you seek to buy. A lender, in this case, a bank or any financial institution offers you cash up front and you as the borrower then pays for the property using the house as collateral. The main difference with other loans is that a mortgage is long-term and can go up to 25 years.

Be aware of mortgage perceptions

Most likely you are aware of the negative perceptions around mortgage products. This is because the process is more complex than a regular loan. First the turnaround time is longer than other facilities like personal loans and people find it tedious. Depending on the property you’re taking, the vendor may be pushing you to make payments while your mortgage is still being processed and you may end up losing to another buyer. Second, the cost of getting a mortgage is higher than other loans because of closing costs. So it’s understandable that people have reservations.

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 can buy a house in five years with that same amount.

You are not too young

If you have an income from a job or a business, you should consider taking out a mortgage while you are still young. 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, like during a pandemic and you cannot repay the loan. In such situations, you can approach the bank and explain your situation. For instance, if your business has been affected by the pandemic, the bank will give you a 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.

Most fraud cases are linked to land and property so you must be extra careful in your search. When scouting for the dream house you want to buy, use referrals by other recent home buyers. Interview at least a few agents, and request references. Extend that due diligence to the property you pick. If you want to buy an off-plan property (where the structure has not been built yet but is cheaper and is promised to be done at a certain time) do not just take the vendors’ word for it and start paying deposits immediately. Find out if it’s a genuine property.

Do thorough research on the property. Think about your long-term needs like if you may want to expand your family or if you want to live in apartments which are cheaper but offer less privacy. Afterwards, compare prices with the same property in the market.

Don’t Forget to Save for Closing Costs

Always beware of additional costs that are not covered by the mortgage. These are called closing costs and are paid out-of-pocket and are three to four per cent of the purchase price of your home. Your lender should give you a specific number upfront so that you can tell what to bring on closing day.

These fees include processing fees, insurance for the property you’re buying and for yourself as the borrower, payments for valuation, and legal fees for the lawyer doing the transfers.

Save money for your closing costs and down payment as you would on an emergency fund.

Shop around for a low rate

Don’t accept the first offer on the table. A seemingly small difference in mortgage rates can save you millions of shillings over the course of a 25-year mortgage period. The rates of different banking institutions are almost similar as all banks are regulated by the Central Bank of Kenya under one market rate. However, there is a slight difference with the lowest rate being 12.2 per cent and the highest 15.1 per cent.

Additionally, find out if the organisation you work for has an MoU with a banking institution as the rates will be lower if they have a deal.

On negotiating for lower rates, it may be difficult for first-time buyers but platinum customers or those clients who have been banking with an institution for a long time can get better rates for a second mortgage.

Your credit score matters

When you’re applying for a mortgage facility, know that the bank will visit your CRB report. They will look up your borrowing history in all banking institutions, the loans you have paid up and the ones you have defaulted on.

If the income you have cannot service the facilities you already took up and the new ones, the mortgage process will not proceed. Note that the CRB is updated continuously so if you pay up your defaulted loans you will be removed from the blacklist. After the initial default status has been regularised, you can proceed with the mortgage process.

Get your documentation in order

After you identify the property, the vendor should give you an offer for sale for example a unit for this amount, payment details, the deposit amount and how many days you need to clear the balance.

Afterwards you will get an offer letter, and a copy of the lease. At the bank, you will need to fill out a loan application. Other key documents are your national Identity Card and your KRA pin. If you are employed they will need your pay slip for the last three months and your bank statements for the last six months from your bank.

They may also require a letter from your employer stating the terms of your employment and job title. In terms of closing costs, the bank should prepare an Excel document for you. Acknowledge and sign to show that you have understood everything you’re meant to cater for during the process.

Determine how much you can borrow

Your income is the main determinant on the amount the bank will give you. If you’re working you will need to provide your pay slip and if you are in business, your audited books of accounts will do. The bank will then advise you based on your income per month, how much you can be given, factoring in the ‘one-third rule’ of living expenses. The rule says 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.

Do not get a mortgage broker

A few years back, banks were receptive to agents. The agents would link borrowers with a bank to access the mortgage facility. That brought about a lot of fraud as people were using fake pay slips 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.

Expect a few hiccups before closing

Track the process because sometimes it can be slow especially when lawyers are involved. You need to follow up and know what is going on and when you are required to sign documents or to make payments.

If you’re not careful, 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 it for the rest of the process to continue. Lastly, do not pay the deposit before your loan has been approved by your financier. Apply for your mortgage and once it has been approved and you’ve been given an offer letter, feel free to pay for the down payment.

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