Buying Your First Home: 6 Steps to Prepare Financially
2022 Aug 4 | by Apple Barretto
How to financially prepare for your new home:
- Repair your credit
- Study your debt-to-income ratio
- Know how much you can afford
- Prepare for a downpayment
- Prepare an emergency fund
- Prepare for the loan application process
When you’re getting ready to buy a home in the Philippines, you need to be financially prepared — from figuring out your budget, deciding where to get a loan, calculating tax fees, and so on, This may seem like a challenging task but don’t worry. We’ve prepared a guide on how to make your home purchase journey a smooth experience.
Repair your credit
Your credit score is a major factor in applying for loans and mortgages, which are necessary if you want to buy a home. So, the first step you need to take is to repair any black marks on your credit that you may have. This includes things such as outstanding loans, late payments, and accounts in collections.
Start making these repair efforts at least six months to a year before you plan on starting the process of buying a new home. Make sure to pay off any due balances, or negotiate settlements with your creditors. Getting caught up on these outstanding debts will clean up your debt score, making you more attractive to banks and lending institutions.
Study your debt-to-income ratio
After cleaning up your debt score, it’s time to figure out your debt-to-income ratio (DTI). Loans use DTIs to know how your expenses stack up against your income. It’s a good indicator of how comfortable your finances are, and whether or not you can take on the additional debt of a house loan.
Ideally, your future mortgage payments should equal less than 30% of your current income. Accounting for your other debts, plus your new mortgage, your DTI should be no more than 40%.
That said, every bank and lender has different guidelines when it comes to home loans, so it’s best to consult them about it. Depending on your financial situation, you might need to pay down debt balances before trying again.
There are a few things you can do in the meantime to improve your DTI. Make sure to pay your bills on time, reduce your non-essential spending, and avoid applying for new credit accounts.
Know how much you can afford
Buying a new home is a big financial task, so ask yourself if you’re able to afford it. Your DTI, as we mentioned, is a good indicator of whether you can afford to pay back your home loan. However, there are other payments to consider for your new home.
Property taxes, which you’ll pay annually, will depend on where you live and the value of your property (around 1% to 2% of assessed value). Home insurance, which requires a monthly premium, is another thing to consider for your budget as it helps protect your new home from various disasters.
Private mortgage insurance (PMI) is another requirement when you pay less than a 20% down payment. Homeowner’s Association (HOA) fees are another factor, which you use to pay for the communal amenities in your neighborhood.
Aside from that, the home itself will require significant financing in terms of upkeep, utility bills, furniture, upgrades, etc. A good rule of thumb is to allocate at least 1% of your home’s value each year to use for maintenance and repairs.
Prepare for a downpayment
A bank or Pag-IBIG housing loan will help cover a significant part of your house’s cost, but you also need some cash in hand to cover the down payment.
If you’re buying a condo unit, then save at least 5% of the unit’s cost for its down payment. You can pay this in a lump sum, or spread it out into several months, depending on what you negotiate with the property developer.
On the other hand, buying a house or lot may or may not require you to pay any down payment, depending on the loan you get. Under PAG-IBIG financing, you will not need to pay a down payment, but you do have to pay some processing fees. Be sure to consult with the financial representative about what kind of down payment or fees to expect when inquiring about home loans.
Prepare an emergency fund
Managing a home takes a lot of work, and you have to prepare for unforeseen expenses. Aside from loans and down payments, you also need to prepare money for unexpected setbacks with your home purchase.
So, budget for a home emergency fund. This helps you shoulder all the sudden expenses your home may have. This includes home improvements like roof leaks, pest infestation, home appliances breaking, and so on.
To prepare a strong emergency fund, start allocating some of your income to build at least three to six months of your home expenses. For example, if you estimate spending PHP 10,000 per month on your home’s maintenance, then you need to save at least PHP 30,000 to 60,000 as an emergency fund.
Prepare for the loan application process
Lastly, you need to prepare for your loan application. Your application may be rejected if you don’t prepare the right documents, or have financial issues. So, you must prepare in advance to increase your chances of approval.
The first thing that lenders will look at, aside from your credit score and DTI, is your financial stability. So, you’ll have to show them that you have permanent employment for at least a year or a business that’s been operating for at least two years.
That said, if you’re planning on applying for a home loan, it’s best to stay in your current job. Put off any intentions of resigning to start your own business or seek other employment opportunities in the meantime. If you’ve recently switched professions or resigned, then it’s likely that your application will be delayed, if not rejected.
Next, beef up your savings account. Lenders will look at how much you have saved up to see if you can afford the monthly payments. If you have enough saved up for that, then they will have a more positive impression of your ability to pay them back.
Lastly, prepare all the documents to back up your words. Always ask the financial institution you’re applying to what documents you need to submit for your application. Generally, you’ll need to present official government-issued IDs, proof of income, payslips, tax payments, and other financial documents that prove your DTI, credit score, and your income.
If you’re thinking of buying a new home, then that entails financial readiness. You’ll need our guide on how to financially prepare for a new home to get you started on solidifying your investment plan!
Lastly, if you need help looking for high-quality yet affordable homes for sale in the Philippines, reach out to Pueblo de Oro. We go the extra mile in developing premier lots at the best value for Filipino families. Contact us today to get started on finding your dream home.