Financing your home
Buying a home is the biggest financial commitment most of us will ever make. As with any large project or goal, it requires dealing with a variety of complex issues. The best approach is to divide the process into manageable tasks.
Like most other purchases, there are two basic ways to get the money to finance your new home – saving or borrowing. However, most of us will not be able to save up all of funds required and will have to seek funding from a bank or other lending institution.
Therefore, whether you are buying a house or building, what you can afford is determine by what you have saved and what you can borrow. How much you can borrow is determined by four factors: your assets, your income, your debts and your mortgage.
Therefore, it is suggested that before you find the home of your dreams, you should determine how much house you can afford. Ideally, it would be best if you have the lender pre-qualify you to borrow up to a certain amount. This allows you to work with a sensible budget for buying or building your home.
Since you’ll need to complete a loan application and it may take some time to gather and assemble the required information, understanding the process through prequalification should help you to make it run smoother.
While different lenders across the Caribbean have different standards, The Federal National Mortgage Association (Fannie Mae is a US government-sponsored organisation that purchases mortgages from lenders and sells them to investors) has established two income-to-debt ratios as standard requirements for conventional mortgages. The first requirement is that monthly mortgage principal and interest payments, plus insurance and property taxes, cannot exceed 28% of the buyer’s gross monthly income. The second requirement limits total monthly debt payments (housing, credit cards, car payments, etc.) to 36% of gross monthly income. In addition to these requirements, you may have to pay 10% to 20% down on the total purchase price to qualify for a conventional mortgage.
We recommend these as excellent guidelines.
The house you can afford will also depend on your mortgage’s term and interest rate. The term is the length of time (usually 20 or 35 years) over which payments will be paid. The rate can be fixed (meaning it doesn’t change over the life of the loan) or variable (it fluctuates with market conditions or as determined by the lender).
The longer term lowers the monthly payment, while the fixed rate provides stability over the life of the loan. Note that very few lenders in the Caribbean provide fixed rates beyond 10 years.
Finding the right mortgage for you
- Estimate how long you expect to live in the house. If the answer is less than three to five years, consider a variable rate mortgage, which typically starts out with a lower rate. If you plan to live in your new home longer than five years, a fixed-rate mortgage offers protection against rising interest rates.
- Shop around for mortgage rates and terms. Banks, credit unions and insurance companies all offer mortgages. Compare at least three lenders.
- Add up all the costs for each lender – such as fees and closing costs to determine at the total mortgage cost for each lender.
- Talk to us at Lashley Financial to help you identify and negotiate the mortgage that is right for you.
Some of the information you will need to apply for a mortgage
- Current address
- Previous address (if current address is less than 3 years)
- Current employment information (e.g. employer’s address, telephone number).
- Previous employment information (if current employment is less than 3 years)
- Sources of verifiable income (pay slip, employment letter, bank statement confirming direct deposit, investment statement). If self-employed, the last 2 years Notice of Assessments from your Income Tax return
- Value of assets including properties, vehicles, investments, and savings
- Most recent mortgage/loan statements
- Most recent credit card statements
- Estimated value of your home