Homeowners, in their desire to acquire their dream home, must be mindful of their own limits. They must be mindful that the mortgage facility would probably be their most significant, long term loan commitment. That being the case, due care must be exercised in making the commitment to a mortgage.
Unfortunately many persons still do not understand the impact of poor credit history on their ability to obtain future financing. A poor credit history is one, which reflects among other things, missed and/or late payments of monthly instalments on existing and/or previous loans. A credit profile that is also characterised by frequent borrowing or attempts to borrow, can also adversely affect one’s ability to readily obtain mortgage financing. Such information – which is available to all subscribers of the Automated Credit Bureau (i.e. banks and other financial institutions) – is critical to the decision regarding whether or not a mortgage loan should be granted.
It is therefore imperative that you ensure that your credit history/profile is such that it boosts your eligibility for mortgage financing. This means that not only should you make timely payments on your consumer loans, but also on often neglected credit card(s). It would be of greater benefit to consider paying off any outstanding balances on your credit card.
While it is more desirous that pre-approval is obtained prior to signing your agreement for sale and paying your deposit on your new home, it is equally important to ensure that you are pre-qualified by TTMF for the mortgage that you are proposing to secure. This safeguards you from contracting to purchase a property for which you may not qualify for the appropriate level of financing, and running the risk of losing your deposit.
Pre-Qualification is particularly recommended where the mortgage to be granted is for construction purposes, as this would guide you in your discussion with your building contractors regarding the size and stature of the building to be constructed.
Most persons, when taking a mortgage seek to borrow as much money as possible in order to minimise the amount of the deposit that they would be required to pay. The result however, is that this will increase the time required to enjoy the benefit of any significant equity in the property, and interest costs would be that much higher.
There are also those who expect that their incomes will eventually increase thereby making the payment of their monthly instalment more comfortable and affordable. The reality is, however, that most first time purchasers underestimate how expensive homeownership can be compared to renting or living with relatives. Payments with respect to property taxes and insurances, higher utility bills, repairs and maintenance, just to name a few, will be incremental costs payable in addition to the mortgage instalment.
The maximum mortgage instalment should not exceed 33.3% of gross monthly income. Many financial advisers suggest however, that limiting your housing costs (i.e. mortgage payments, property taxes and homeowners insurance) to 25% of gross income, is much more sustainable and provides for a better cash flow position. In addition, a significant mortgage instalment leaves fewer funds available for the achievement of other financial and personal goals.
Budgeting for closing costs is often omitted in the consideration of the total cost of home acquisition. These costs typically include legal fees and charges (the most significant of which would be stamp duty in respect of the Deed of Conveyance), prepaid home-owners insurance and other property taxes, and where required, mortgage indemnity insurance.
It is therefore advisable that you plan for your closing costs, and ensure that you have the cash available for these payments when they become due. TTMF can provide you with an estimate of these costs, however, as a general guide your closing costs can range from 5% to 7% of the loan amount.
If you spend “every last penny” to pay closing costs, there will be nothing left for those costs that you did not anticipate or cater for, like the need to install a water tank and pump.
It is for this reason that we advise first time homeowners to have available for closing, reserves of the equivalent of three months’ worth of living expenses. Admittedly this may be difficult if not impossible for most salaried persons to achieve. However, following this strategy would prepare you to handle the additional costs that come with homeownership with considerably reduced stress.
Applying for a mortgage is not an everyday event. For this reason, those who undertake this life-changing opportunity may be daunted by the cost, the paperwork and the time that it takes to complete the process. It is therefore important that insofar as possible these simple yet critical guidelines are adhered to, to ensure that the achievement of this significant milestone is a truly positive experience.