Guide to getting a loan for your own effort in property finance
The dream of owning a home can seem like a daunting task for many, especially if you are faced with the challenge of raising sufficient equity. Fortunately, there are ways to get financial help for this initial investment. In this guide, we cover how to get a loan for your own effort in property finance.
Why Own Effort Is So Important
The equity effort, or equity contribution, represents your financial commitment and responsibility towards the property. For lenders, it is a sign of your seriousness and ability to take financial responsibility. It is often seen as a buffer for possible future financial setbacks. Read more about your options here to financing real estate without equity.
Historical Context: Over the past decades, we have seen equity requirements fluctuate based on economic trends and market conditions. There was a time, especially before the 2008 financial crisis, when 100% financing (and sometimes even more) was not uncommon. However, after the crisis, financial institutions became more cautious and started requiring substantial equity more often.
Current Trends: Today, the average percentage for equity in many countries is between 10% and 20% of the purchase price of the house. This means that if you want to buy a €300,000 home, you may need to provide between €30,000 and €60,000 as an equity stake. However, these figures can vary depending on your location, the type of loan, and the specific lender.
Importance of Flexibility: Some financial institutions still offer mortgage products with lower equity, especially for first-time buyers or those with exceptional credit profiles. There are also government programmes and subsidies that can help lower the required equity.
Criteria of Lenders
Lenders usually have a set of criteria you need to meet:
- Stable Income: You must be able to prove that you have a stable and sufficient income. Lenders often look at your income history over the past two to three years. For example, if you have an average annual income of €50,000, they like to see this consistently over that period. Drastic decreases or increases may raise questions.
- Credit history: A good credit history helps show your reliability. Late payments, bankruptcies or high debts can drastically lower your score.
- Debt-to-income ratio: Your total debt to income ratio should be within acceptable limits. As a rule of thumb, your total monthly debt payments should not exceed 36% of your gross monthly income. So, if you earn €4,000 monthly, your total debt payments should stay below €1,440.
The Influence of Equity on your Mortgage
The percentage of the deductible directly affects the terms of your mortgage. Higher equity can lead to lower interest rates, which can lead to significant savings over the life of the loan. Moreover, if you can offer less than 20% equity, you may have to take out mortgage insurance, which increases your monthly costs.
It is crucial to understand the requirements and criteria of lenders and prepare accordingly. By optimising your finances and credit profile, you will increase your chances of approval and better loan terms.
Preparing a Strong Loan Application
1. Detailed Financial Documentation: Make sure you have all the necessary documents ready. This includes pay slips, tax returns, bank statements and any other evidence of income such as bonuses or freelance work. Example: If you have an average annual income of €60,000, have documentation confirming this amount, such as your annual tax return or pay slips for the past 12 months.
2. Understand your Creditworthiness: Get a full credit report before submitting your application. This gives you a chance to identify and correct any errors. A recent survey showed that 20% of consumers found errors in their credit reports that, once corrected, could raise their credit score.
3. Minimise Debt: If you currently have €10,000 in credit card debt at an interest rate of 15%, consider paying off or reducing this debt before applying for a loan. This not only improves your debt-to-income ratio, but it also shows the lender that you are financially responsible.
Tips for a Successful Loan Application:
- Avoid Big Purchases: In the months leading up to your application, it is wise not to make any major purchases, such as a new car. This can negatively affect your debt-to-income ratio.
- Build an Emergency Fund: Lenders like to see that you have a buffer for unexpected expenses. An emergency fund of three to six months' worth of expenses can make your loan application stronger.
- Be Honest: Concealing or falsifying information can have serious consequences and reduce your chances of approval. Be transparent and honest in your application.
- Consider a guarantor: If you are worried about your creditworthiness, a guarantor with a strong credit history can increase your chances of approval.
Thorough preparation can make the difference between approval and rejection. By committing to financial health and following the steps and tips above, you will increase your chances of getting a favourable loan. And if traditional financing methods are not feasible, consider alternative solutions such as Immotokens co-buy option, which matches buyers and investors to get equity financed.
Alternative Financing Routes: Immotokens Co-purchase Option
An alternative option to traditional financing is the co-buy formula offered by Immotokens. This involves matching buyers with investors who help finance the equity. This can be a godsend for those who struggle with traditional financing methods.
Conclusion
Obtaining a loan for your own effort in real estate can be challenging, but with the right preparation and knowledge of your options, it is possible to overcome this hurdle. By educating yourself properly, organising your finances and considering which financing route suits you best, you are already on your way to your dream home.
