Go! Housing

In this financial relationship, the borrower is able to acquire the asset immediately while paying for it on an installment basis over an extended time frame. Meanwhile, the creditor profits from the transaction by charging interest on the amount borrowed.

As the name suggests, a housing loan can be used to build a house. However, it can also be used to purchase vacant lots, house and lot packages, townhouses, condominiums and more. In the Philippines, this form of loan is most often used to purchase residential properties for families.

As Filipinos gain greater purchasing power, many find themselves seriously considering the idea of owning their own homes. For those who don’t prefer to pay for real estate assets in cash, housing loans are attractive due to the following reasons:

• Better Than Renting. Housing is a basic need for most people. Given the relatively high real estate prices in the country with respect to current wages, it’s easy to see why many Filipinos rent their living spaces instead of purchasing them. The cost of living especially in urban areas makes owning property seem like a distant prospect, leaving the common man to resign to the idea of paying rent for the foreseeable future.Many Filipinos may not realize it, but the cost of rent these days isn’t too far off from what you would be paying for property acquired via housing loan. For a little extra each month, you could call the property your own after just several years. With rent, you can only use the place for as long as you can afford the monthly payments.
• Maintaining Financial Flexibility. Even when you’ve saved up enough cash to buy a house and lot package, splurging all your savings on it still may not be a good idea. Depleting your savings just to purchase a house can leave you strapped for cash in the coming years. If you find yourself in a situation where you urgently need cash, you can’t go back to the property seller and demand your money back.
  Investment opportunities and medical emergencies can create situations where you’ll need substantial cash in hand. Unless you’ll have plenty of funds left in your account after a purchase, deferred payments via housing loan may still be the better option to preserve your financial flexibility.
• It’s Good for Your Credit History. Maintaining a good credit standing with financial institutions such as banks can open up many doors for you in the future. New loans can be approved with ease and your credit limits on credit cards can be increased dramatically over time. This helps you access funds for future needs and opportunities – all thanks to the fact that financial institutions view you as a trustworthy borrower.One of the best ways to build your credit standing in the Philippines is by successfully completing a housing loan. Making payments on time and seeing the loan through to the end will speak volumes about your credibility as a borrower.
• It Gets You an Appreciating Asset. The beauty of real estate is the fact that it almost never depreciates. It’s one of the very few assets that only increase in price as time goes by. This is particularly true for emerging economies such as the Philippines where there’s still a lot of room for economic growth and the demand for real estate is expected to keep increasing for the foreseeable future.This means that if you ever want to sell your home, you can do so at a much higher price than what you acquired it for today. This also means that even if you’re paying a bank interest for granting your housing loan, the appreciation of your property’s value nullifies the extra money that you’re spending on the house or condominium.Land is also an asset that can be passed on to your children or other loved ones in your advanced age. The real estate will be just as useful to them as it was to you on the day you acquired it. The structure built on it may need to be updated, but the land will only become more valuable over time.

More than any other form of loan, housing loans deliver the best returns on your investment. Whether your intentions are for personal use or business, it’s hard to go wrong with this form of loan.

However, there are several other things that you can use this loan for. Here are the most common types allowed by banks and other creditors:

• Purchase. This is the act of acquiring the property by buying it outright using a down payment and the lump sum from the housing loan.
• Construction. If the borrower already has land and wishes to have a structure constructed on it, a home loan may be used to fund the project. In cases like these, the lot is sometimes made the collateral for the loan.
• Renovation. If the borrower already owns a lot with a structure on it, but wishes to make repairs and improvements, a housing loan can also be used to finance the project.
• Refinancing. Refinancing is an agreement between a creditor and a borrower where the borrower is already engaged in a housing loan but wishes to receive lower interest rates. The creditor may opt to pay off the existing loan and take over it with a new set of terms. The original creditor is then taken out of the equation as the original loan has been satisfied, while the refinancing creditor assumes the right to collect monthly amortization payments from the borrower.
• Home Equity Loan. A home equity loan is a type of secure loan where the creditor lends a borrower substantial amounts of money which will be paid over a period that both parties mutually agree to. In this agreement, the borrower uses property such as a house and lot for collateral in the transaction.

The value of the collateral is determined by an appraiser from the financial institution, which also determines the amount of money that can be borrowed. In the Philippines, this type of loan is often used to pay for medical bills, to finance business ventures, for renovations, etc.

The following are the types of properties that can be acquired in the Philippines through financing:

• Vacant Lot. This is real estate that doesn’t have any structure built on it.
• House and Lot. This is a property type that has both land and a structure built on it.
• Condominium. This is a type of single-unit living space that’s found in a building where other units are also located. Legally, the individual owns the unit but only jointly owns common property and the land where the building stands jointly with other owners.
• Townhouse. Townhouses are multi-floor housing structures that share walls with other townhouses. Each one is sold separately by a developer to an individual owner.

Here are some areas that you have to give careful thought to before deciding to take on the responsibilities that come with a housing loan:

• You’ve Saved Enough for a Down Payment. If you’ve saved enough to pay 20% of the property’s price up front while still retaining substantial funds in your bank account, this might be the best time to commit to a housing loan. Some property developers and sellers even allow you to pay for the down payment on an installment basis with no interest to help make the purchase easier for you.
• You Can Afford the Monthly Amortization. Aside from the down payment, you’ll also have to account for the monthly amortization fees that you’ll have to pay once the loan term begins. If you calculate that you can comfortably pay your monthly dues while leaving enough for your living expenses each month, you may be ready to take on a housing loan.
• You Need a Permanent Living Space. If you’re tired of having to move from one rented space to another and you desire to have a living space that’s all yours, a housing loan may be right for you. This is increasingly true for people living in urban areas who wish to move to nearby suburbs where there’s less traffic, congestion and pollution.
• You Want an Ideal Place to Raise Kids. Some parents who are raising very young children prefer to bring up their kids in environments which have more space to move around than the average condominium or apartment. If you wish to have a place where children can enjoy some yard space and walk around safely in a neighborhood, a loan may be the best means to acquire a house and lot.
• You Want a Surefire Investment. Even if you’re not planning to live in the property yourself or even build a structure on it, purchasing real estate can still be a great idea. For one, you don’t have to do anything for the asset to be profitable: It grows in value over time by itself. If you want greater returns on your investment, you can lease the property to another party to generate passive income.Some savvy investors actually devise arrangements where they acquire property through housing loans and let other people rent or lease it. This means that the investor only needs to pay for the down payment, then lets the lessor’s monthly payments take care of the property’s amortization. In effect, the investor gains a high-valued piece of property for a lot less than what it’s worth by having other people pay for it.

If you’ve pondered all these factors and you still believe that you have the means and desire to enter into a housing loan agreement, you can start the process of selecting a financial institution that can give you the best terms.

However, most creditors base their processes on a standard procedure that will allow them to get the necessary information and documents to approve your request. The following are the steps that you can request when you file a bank loan for the first time:

• Identify Your Desired Property. Housing loans allow borrowers to purchase a wide range of properties depending on their needs. As mentioned previously, these can be vacant lots, house and lot packages, condominiums or townhouses. The first thing to do on your end is to determine which property type best suits your purposes.After you decide on the property type, it’s time to decide on the location you desire. Most creditors will not discriminate against any location except when it’s known to be at risk of war, natural disasters and other factors that might compromise its value.
• Verify the Ownership Status of the Property. Once you’ve identified the exact property you wish to acquire and made contact with the seller, it’s time to exercise some due diligence to determine whether the person has the right to sell the property and whether or not the property might be hiding some nasty surprises.If you’re buying a vacant lot or a house and lot, the first thing you’ll want to look for is a copy of the lot’s title. Make sure that the name on the title and of the person/company selling the property to you are one and the same. You will also need to make sure that the land title is “clean,” meaning there are no debts listed against it. Next, you’ll need to make sure that there are no pending cases involving the property. If the property is under legal dispute, a creditor is unlikely to approve a loan for it.You’ll also want to hire a private land surveyor and a geodetic engineer to make sure that the property you’re purchasing is indeed the one described in the title. A discrepancy of a few square meters can end up costing you millions later on.You can check all of these details by asking for a certified true copy of the title from the municipality’s Registry of Deeds. You will need the title number and the name of the owner to request this public document. Note that these steps are not necessary when using a housing loan for purposes that do not involve land acquisition such as condominium purchases, renovation, refinancing and home equity loans.
• Get an Official Quote from the Seller. Once you’ve identified a seller whom you wish to buy the property from, you need to ask for an official quote as a supporting document for your loan application.
• Look for the Bank with the Best Deal. Once you’ve verified the seller’s authority to transact with you, it’s time to scout for financial institutions that can lend you the funds necessary for the purchase. Generally, you’ll want to look for a financial institutions that will give you the lowest interest rates with no strings attached.
• Fill Out the Bank’s Application Form. When you’re sure which bank offers the best terms for your housing loan, it’s time to file your housing loan application form. You can ask for this when you visit their branch closest to you or you can do it online via their web-based forms.
• Submit the Required Documents. Different creditors typically require slightly different sets of documents. However, most banks will likely ask for the following:
  • Valid IDs (government issued)
  • The quote from the dealer
  • Certificate of employment (if employed)
  • Income Tax Return (ITR)
  • Proofs of billing
  • DTI registration if self-employed
  • 3-month bank statement
  • Latest GIS (for corporations)
  • Board resolution (For corporations)
  • Secretary’s certificate (For corporations)
  • Audited financial statement (For corporations)There are usually fewer document requirements for individuals seeking loans compared to corporations.
• Get the Property Appraised. The next step is for the bank to send an appraiser to view the property. This will help the bank determine its perceived value of your desired property. The figure will then be used to calculate the amount of money that the bank is willing to loan to you.
• Answer the Verification Call. After filing your loan application, an agent from the bank may give you a call to make sure that you indeed filed requirements for a housing loan.
• Wait Patiently. The bank will let you know how many days it will take for them to process your application. Wait for them to do so and try not to follow up during that period. If they finish processing your application time, they will likely contact you immediately. If the waiting time lapses and you don’t hear back from them, give the bank a gentle follow up call.
• Once Approved, Sign the Contract. If you get a positive response from the bank, they’ll prepare a final contract with your name on it. Read and understand the terms of the agreement and the ramifications of certain actions while the loan is in effect. Once you’re sure that the terms match what you and the bank have agreed on, sign it and complete the purchase of the property.

Different financial institutions have different criteria for assessing a person’s eligibility to secure a loan, but the following are the most commonly considered factors during the process:

• Age. Most banks will have a minimum age requirement for anyone who wants to apply for a loan. Housing loans typically put the minimum at 21 years of age, but some creditors will require the borrower to be at least 25 years old. In cases where age is an issue, the bank may still approve the application if the borrower can convince a co-maker to sign off on the loan application.
• Source of Income. The bank will have to feel confident about your ability to pay your monthly amortization. One of the most crucial aspects of securing a housing loan approval is your ability to prove that you have a stable and sizeable income that can take on your monthly dues on top of your current living expenses.
• Job Tenure. Your work history will also play a role in your bank’s decision. More conservative creditors like seeing at least 2 years of tenure in your current employment. The longer you’ve been there, the more that the bank will be convinced that you have staying power in your work environment.
• Business Status. If you’re self-employed or you’re an owner in a corporation, the status of your business will be a factor in your housing loan approval chances. Banks will want to know if the company is doing well or if it’s on its way to financial difficulties.
• Credit Records. If you’ve taken on other loans in the past and you’ve completed their payments without any issues, banks will see that as a positive sign. Car loans are a good example. The same goes for personal loans and credit card bills. Conversely, a credit history that’s littered with late payments and repossessions will be a very red flag for any potential lender.
• Existing Loans. You may be a good payer on your loans, but if a bank sees that you have too many amortizations to pay per month, it just might balk at the prospect of granting you a housing loan. Banks in the Philippines have a certain level of visibility on your loan history and if a potential creditor sees that adding more debt to your name might compromise your ability to pay, it can decline your application.
• Criminal Records. A history of convictions or pending cases against your name will be viewed negatively by a bank when you apply for a housing loan. This is particularly true if the charges against you involve fraud of any sort. Naturally, this will diminish a bank’s perception of your trustworthiness whether the accusations are true or not. Ultimately, imprisonment will profoundly compromise your ability to repay your creditor, making business with you a high-risk proposition for any institution.

People with low income ranges may be allowed to borrow a little less than that. Conversely, more affluent borrowers can be lent tens of millions of pesos if the bank determines that the person has a good chance of completing his loan payments over the time frame agreed upon.

The majority of housing loan borrowers opt for at least 10 years but some like shorter terms to avoid paying more on interest rates.

Keeping the term within 10 years or less allows you to mitigate interest with the appreciation rate of the property.

When you’re trying to decide on the length of your housing loan’s term, consider the following factors:

• Your Monthly Income. Determining how much money you have left after taxes, expenses and payments for your bills will help you gauge how much you can afford to use on housing loan payments. Run that number against your expected monthly amortization and see how comfortably you can live for the next few years while you pay for your loan. If it looks like you’ll have little to no financial breathing room once your housing loan starts collecting, add a year or two to your term.
• The Stability of Your Income. You may have good income now, but do you expect to keep making money at the same rate in the next few years? If so, do you expect to earn more or less than what you’re making now? For people who don’t have fixed income, it’s easy to fall into the trap of thinking that your good luck will hold for the foreseeable future. Sometimes, however, finances don’t pan out like you expected them to. Be realistic and be honest with yourself. When in doubt, spread your payments out by adding more years.
• Your Savings. If something goes awry with your cash flow such as an unfortunate job loss or hard times for your business, will you be able to keep paying your housing loan? If so, for how long? If the answer is less than 2-3 months, play things safe by choosing a longer-term housing loan. Conversely, if you have enough saved to sustain yourself for years, you might want to go for fewer years on your loan.
• Your Purpose. The length of your term should also be determined by the purpose behind your housing loan. For instance, it’s okay to loan a house for 10 years or even more if you’re planning to personally live in it with your family and you have no plans of selling it or renting it out. This scenario is similar to leasing the property, but you can keep it after the term lapses.On the other hand, if you’re acquiring the property as an investment that you’ll be re-selling, shorter loan terms are generally better. Fewer years means less interest to pay. The less interest you pay, the greater your profitability when you successfully sell the property in the future.The same goes for situations where you intend to allow other people to rent or lease your property. The shorter the term of the loan, the sooner you can begin enjoying the full profits on your investment.

Several factors are assessed carefully and some calculations are made to estimate the property’s value to the bank. These factors may differ depending on which creditor is doing the appraisal but the following areas generally influence a property’s appraisal the most:

• Location. Location is often the single, biggest factor that determines a property’s pricing. If the real estate is in a busy, highly commercial area and is close to places that attract large numbers of people, it’s a safe bet that its appraisal will be pretty good. Being close to malls, schools, hospitals, government facilities and other similar spots are always certain to drive up value.
• Disaster Resiliency. Real estate in places that aren’t frequently hit by typhoons, aren’t susceptible to flooding and aren’t close to fault lines are usually valued well. Conversely, property situated in areas where there’s a regular threat of disaster will likely receive lower appraisal values.
• Growth Outlook. Some areas may seem underdeveloped but if they have good potential to grow in value, banks just might give them a better appraisal. For instance, rural property near farmland that’s soon to be converted into a government facility complex has excellent value outlook. Most banks will take note of this and consider it when appraising it and finalizing its perceived worth.
• Zonal Value. This is a figure that your municipal hall’s Register of Deeds, Bureau of Internal revenue (BIR) and Assessor’s Office use to determine property tax. Depending on the zoning category in which the property is located, this could vary. Though zonal value is intended only as a reference for taxation, some creditors may use it as a factor in their appraisals.
• Lot Area. The size of the lot is one of the fundamental elements in determining its appraised valuation. The larger the lot, the greater its perception of worth is.
• Floor Area. If the property has a structure built on it such as a house, the floor area will be measured in order to determine its estimated price.
• Structural Construction. The size of the structure is one thing. The quality of its materials is another. Depending on what was used by the builder and how everything was put together, the appraised value of the property may be higher or lower.
• Current Condition. This involves inspecting the structure’s wear and tear. The more damage and wear there is, the lower the appraisal gets., Conversely, well-maintained structures usually fetch better appraisal values.
• Age of the Structure. Unless the property is considered a heritage house, its value generally declines as it ages. The older the structure on the property gets, the lower its appraised value will be.

In the event that the borrower defaults on the loan, the asset can be foreclosed and sold off to the public so the creditor can recoup its losses.

Collaterals on housing loans can vary depending on what you use the loan for. If you’re purchasing a vacant lot or a house and lot, the collateral is the property itself. If for whatever reason you are unable to pay your monthly amortization for 2 or 3 months, the bank can seize the assets and sell it off.

If you already own land and you’re using a loan to finance the construction of a structure on it, things will work a little differently. The bank will not be able to take away just the structure in case of a default occurs, so you’ll likely be asked to put up your land as collateral. The same thing applies for housing loans that finance renovation projects. Your real estate will likely be used as the collateral for the loan in case things don’t go as planned.

That is, the interest rate that the bank states is the percentage charged on the total amount loaned for every year that the loan is in effect. This means that for each year you add to the total loan term, the amount of interest you pay grows significantly.

For instance, let’s say you borrowed PhP 1,000,000.00 from a bank at an interest rate of 8% per annum to acquire a residential lot. You opted for a 10-year term to make your monthly amortization more manageable. The calculation for your total interest would then be as follows:

Amount loaned: PhP 1,000,000.00 Interest rate: 8% per annum Term: 10 years Interest per annum: PhP 1,000,000.00 x .08 (8%) = PhP 80,000.00 Total interest: PhP 80,000.00 x 10 years = PhP 800,000.00 Total amount owed: PhP 1,000,000.00 + PhP 800,000.00 = PhP 1,800,000.00 Monthly amortization: PhP 1,800,000.00 / 120 months (10 years) = PhP 15,000.00

Please note that this sample calculation assumes that the interest rate will stay the same for the next 10 years. However, most banks have rate fixing policies that can significantly alter interest depending on the choices you make. More on that in the next section.

This amount of interest may seem excessive, but creditors have some valid justifications as to why this is the case. Specifically:

• The interest is the bank’s compensation for helping borrowers acquire assets now while allowing them to pay it back over a very long time frame.
• Borrowers need to realize that economic factors such as inflation and currency fluctuations will likely devalue the cash you pay the bank over the next decade. The money that you pay today will most likely not be worth as much by the time you finish the term.
• Currency devaluation and economic development will also be the same forces responsible for your property’s sustained appreciation. Your property will also be worth a lot more than its current selling price 10 years from now.

If you can afford it, shorten the terms to minimize paying significant amounts on housing loan interest. If not, make yourself more financially flexible by lengthening the term and not worrying as much about interest.

After this time frame expires, the creditor will recalculate the appropriate interest rate for the loan which can then be legally imposed on the borrower.

The fixed interest rate depends on the number of years that the borrower chooses to keep it constant. The fewer the number of years, the lower the interest rate will be. This is because the bank will have an easier time foreseeing prevailing interest rates in the market within a shorter time frame than a longer one, allowing the creditor to minimize risks.

Conversely, more years on the rate fixing period will mean that the fixed rate will be higher. Again, banks do this to minimize risks associated with sharp increases in prevailing interest rates in the housing loan market. On the borrower’s end, this may also be good as it reduces the possibility of his interest rate rising after just a few years.

Unlike other assets, real estate and associated property have more volatile interest rates that can change depending on the following factors:

• Central bank interest rates. Contrary to popular belief, the money that commercial banks hold aren’t just the funds deposited to them by their clients. Commercial banks borrow from their country’s central bank in order to meet the needs of their operations. This includes the funds needed to issue loans to clients. Logically, housing loan interest rates will be higher when central bank interest rates escalate. When the central bank’s rates decline, commercial banks may lower rates for their loans as well.
• The Country’s Economy. When a country’s economy picks up, its citizens gain greater spending power. As it recedes, the opposite will happen. During prosperous years where loan demand is high, interest rates usually increase. On down years, meanwhile, interest rates may be lowered to encourage borrowing.
• Housing loan market conditions. During periods when the housing loan market is more active and competitive, some banks may lower their rates to gain an edge over their peers.

Many Filipinos who apply for housing loans opt for 5-year rate fixing periods. Others may opt for less than that if they feel that the interest rates will stay relatively low in the near future. Still, other borrowers would rather not have interest rate changes in mind and opt for fixed rates throughout the duration of the loan term.

Here are the most popular ones that are used in the Philippines:

• Over-the-Counter Payments. The most traditional payment method for your loan is an over-the-counter transaction that involves physically going to the bank each month, filling out a form and depositing cash.
• Check Deposits. For other people, check deposits make more sense. This is also acceptable to banks as long as the checks have the correct dates. If the check was issued by another bank, a 3-day clearing period will be required and a borrower will have to deliver the check a few days before his loan’s due date to avoid penalties.
• Direct Debit. If the borrower has a savings or checking account in the bank where he got the loan from, he can sign off on an automatic debit arrangement. This basically means that the bank can automatically deduct his monthly payment from his account without him having to physically do a transaction multiple times.

In some cases, creditors may also allow payments via credit card. While this is valid, it’s not the most common way that people settle their dues in the Philippines right now.

In some cases, even the most diligent payers can get caught up in an unexpected circumstance that will compromise his ability to make payments to his loans on a timely basis. The loss of a job, failed business ventures and medical emergencies can all lead to these difficult situations. If you anticipate that you might miss your next housing loan payment, these are the things that you can expect to happen:

1. Your Loan Will Become Delinquent. Once the due date for a payment lases, your loan automatically goes into delinquency. This is not the same as a default, though. Delinquency simply means that your contractual obligations were breached and certain remedies need to be applied sooner than later.
2. You Will Receive Collection Calls. Going into delinquency with your housing loan will carry serious consequences. The least may be persistent calls and reminders from your creditor asking for you to settle your outstanding payments.
3. You Will Be Penalized. Different creditors have different policies when it comes to penalties for late payments. Government lenders such as the Pag-Ibig Fund may charge 1% of the amount due per day. For banks, this can go as high as 7% per day. Obviously, missing days or months on your loan payment will spell financial trouble for you as your debt will accumulate significantly.
4. You Will Have 90 Days to Settle Your Dues. Most financial institutions allow 90 days for a borrower to settle his overdue payments before the account goes into default. Some banks, however, may have stricter policies. It’s best to go over your contract to make sure you know exactly how many days you are given before your loan defaults.
5. Your Property Will Be Foreclosed. If the allowable payment period lapses and the loan defaults, the creditor will have legal rights to foreclose the property. Any and all occupants will be evicted and the borrower loses his ownership of the asset.
6. Collateral Will Be Seized. If any collateral was used to open the housing loan account, the asset will also be seized by the creditor. In the Philippines, this usually happens when land is used as collateral for a housing loan that was used to fund a construction project.
7. Your Property Will Be Auctioned. Foreclosure doesn’t mean that the bank will keep the assets. In fact, it’s in the creditor’s best interest to sell it immediately in order to recoup its losses. Usually, this happens either via direct sales or public auctions. Note that the creditor is entitled to selling both the asset purchased via the loan as well as any collaterals
8. You May Still Be Liable for Remaining Losses. Some borrowers falsely believe that once an asset is foreclosed, the worst is over. In fact, the ordeal may only be beginning. Some creditors have a policy which states that if selling foreclosed assets does not satisfy the borrower’s remaining loan balance, they reserve the right to continue collecting on the remaining balance.

   If the task of collecting the balance goes to a collections agency, the borrower will likely have to endure persistent calls reminding him to settle his loan.

9. Your Credit History Will Get Hurt. Years after your loaned property is foreclosed, you will still be feeling the negative impact of the default in your financial life. For one thing, it will be hard to secure new loans from the same bank and other banks as these institutions share and report information on bad credit with each other. Even if you do end up securing approval, the interest rates given to you will be less than favorable.

   Other bank products and services will also become more difficult to obtain. Credit cards, checks, insurance, etc. may also become difficult to get by.