What to know before applying for a mortgage? 12 key tips — idealista/news

2023-12-08 15:00:03

Very few people can buy a house with cash. Most must ask for a mortgage to the bank to be able to acquire a home to own. This loan covers the remaining part of the sales price that you do not own, although some prior savings are necessary.

If you are thinking about applying for a loan to buy a house and you don’t know where to start or what to know before applying for a mortgage, we give you 11 key tips for applying for one.

Have at least 20% of the value of the home saved

Most banks only grant mortgages for 80% of the value of the home, so you will have to contribute the remaining 20%. Additionally, you will need money for purchase expenses, such as the appraisal, notary fees, and taxes.

Apply for a mortgage that you can afford

Before applying for a mortgage, you must calculate your debt capacity and the monthly payment you are able to pay. It is usually estimated that the mortgage payment should not exceed 35% of your net monthly income. Calculate your income, expenses and debts to determine how much you can afford to pay each month.

Compare the different mortgages

Don’t take the first offer they make you. Compare the different offers from banks to find the one that best suits your needs and budget. Interest rates and terms can vary significantly from one entity to another, so be sure to get multiple proposals.

Understand the terms of the mortgage

Before signing the mortgage deed, it is essential that you understand all the terms and conditions of the contract. This includes:

The interest rate: Percentage applied to the outstanding capital of the mortgage. The interest rate can be fixed or variable.The repayment period: Time you have to return the borrowed capital. The usual repayment terms are 20, 25 or 30 years.The monthly fee: Amount you have to pay the bank each month to amortize the mortgage. The monthly payment is calculated based on the interest rate, the repayment period and the outstanding capital.The associated expenses: In addition to the monthly payment, there are other expenses associated with the mortgage, such as opening expenses, early repayment expenses and cancellation expenses.The commissions: Some banks charge fees for opening the mortgage, early repayment or cancellation.The insurance: Most banks require that you take out life insurance and home insurance for the mortgaged home.Euribor: It is an index that reflects the average interest on loans between European banks, influenced by the policy of the European Central Bank. It directly affects variable mortgages in Spain, since its rise increases the installments of these loans, as has happened since 2022.

Check interest rates

The price of a loan not only depends on the amount you request, but also on the interest rates that the bank charges you. These are the compensation you will give the entity for lending you the money, and they can be fixed or variable.

Fixed rates are the most common and remain the same for the entire duration of the loan. Variable rates, for their part, can rise or fall during the term of the loan, depending on the evolution of market interest rates.

In addition to the rate type, you must also take into account the nominal interest rate (TIN) and the equivalent annual interest rate (APR). The TIN is the percentage of interest applied to the borrowed capital, while the APR includes all expenses associated with the credit, such as commissions.

Prepare the documentation

To grant you the mortgage, banking entities will require a series of documents to ensure that it is viable to grant you the mortgage. Some documents that may be requested from you are the Income Tax Return or proof of income.

Prepare these documents in advance to speed up the process. For example, those people who earn money in the black will not be able to acquire a mortgage, because there is no record of what they earn.

Which mortgage is best for you?

There are many types of mortgages on the market, each with its own characteristics. So that you don’t get lost, here we explain the main modalities and the advantages and disadvantages of each one:

Variable mortgages

In variable mortgages the monthly payment varies depending on the Euribor. Likewise, they have the advantage that, if the Euribor goes down, the installments will also go down, which can mean significant savings. However, they also have the drawback that, if the Euribor rises, the installments will also rise, which can be a problem for families with a tight budget.

Fixed mortgages

Fixed mortgages are those in which the monthly payment does not vary during the entire term of the mortgage. This means that, if you take out a 20-year fixed mortgage, the monthly payment will be the same for 20 years.

They have the advantage that they offer greater security and peace of mind, since you know what you are going to pay each month. However, they also have the drawback that, if the Euribor drops, you will not be able to take advantage of that drop.

Mixed mortgages

Mixed mortgages combine the characteristics of variable and fixed mortgages. In them, the monthly payment is fixed for an initial period, which is usually 5 to 10 years. After this period, the fee becomes variable, that is, linked to the Euribor.

Mixed mortgages can be a good option for families who want to enjoy the security of a fixed payment during the first years, but who also want to have the possibility of benefiting from a possible drop in the Euribor in the future.

Mortgages for young people

Some banks offer special mortgages for young people, aimed at people between 18 and 35 years old. These mortgages typically have more favorable terms than standard mortgages, such as a lower interest rate or more financing.

Negotiate with the bank

When applying for a mortgage, you must be prepared to negotiate the conditions with the bank, as these are not always ideal. Key aspects to negotiate include the dacion en pago clause, which allows the home to be handed over in the event of non-payment, and the duration of the loan, with options ranging up to 40 years to reduce the monthly payment. The interest rate, commissions and cancellation fees can also be negotiated. Being well informed about rights and obligations and being ready to defend your interests are fundamental aspects in this process.

Consult with a financial advisor

Whether you have questions or need guidance, a financial advisor can help you understand the terms of the mortgage and find the best option for you. It is something that can save you many thousands of euros, so it is not advisable to ignore this help.

What to ask when applying for a mortgage

Some of the questions you should ask the entity you want to grant you the mortgage should be the following:

Interest rate and type: Ask about the interest rate and whether the mortgage is fixed, variable or mixedAmortization period: Learn about loan duration and term optionsMonthly fee: How much you will have to pay monthlyAdditional costs: Ask about opening commissions, notary fees and other associated costsEarly repayment possibilities: Find out about the conditions for making early payments or for early cancellation of the loan

How do you know if they are going to give you a mortgage?

To know if they are going to give you a mortgage, banks analyze a series of factors, including:

Income: Banks want to make sure you have enough income to be able to pay your mortgage paymentEmployment stability: Banks prefer to grant mortgages to people with a stable job and senioritySavings: Savings can help reduce the amount of the mortgage and, therefore, the monthly paymentsCredit history: Banks also consult the applicant’s credit history to check if they have outstanding debts or if they have had non-payment problems in the past

When is the best time to apply for a mortgage?

The short answer is that the best time to apply for a mortgage is when you are financially prepared. This means having a good credit history, a stable income level and a good amount of savings for the down payment.

Regarding the economic situation, experts agree that it is better to apply for a mortgage before interest rates rise further. In Spain, the Euribor has risen in recent months and is expected to continue rising in the future.

Therefore, if you are thinking of buying a house, it is recommended that you prepare and compare the offers of different banking entities to find the mortgage that best suits your needs.