The Philippines’ real estate industry is considered as one of the key drivers of the country’s economy. It remains a promising opportunity and has seen a significant boost in interest from both local and international buyers because of its potential for high returns on real estate investments, especially in properties such as condominiums, townhouses and residential lots due to its appreciation potential and rental income opportunities. 

Despite the growing interest in investing in real estate properties in the Philippines, many potential buyers find it difficult to pay the properties in full. The increasing cost associated with buying real estate makes it hard for many prospective buyers to afford buying properties outright. Bank financing offers a practical solution that allows buyers to spread out payment and manage their finances effectively. 

If you’re planning to buy a property, it is important to understand how bank financing works in the Philippines and know its requirements. Having the knowledge and being familiar with the requirements and processes can help you make informed decisions and increases the chance to successfully secure a loan for your investment. 

Overview of Bank Financing for Real Estate in the Philippines

Many buyers opt for bank financing over cash payments when buying a real estate in the Philippines due to its advantages. One of its advantages is to manage large financial commitments, as bank financing offers low interest rates compared to other loan options. Investing in real estate in the Philippines can be quite high, which makes it hard for most potential buyers to pay the full amount at once. Opting for bank financing allows buyers to have a practical solution to pay smaller down payment and cover the rest with affordable monthly installments, making homeownership more attainable. 

Different Types of Loans Available for Real Estate in the Philippines

When purchasing a real estate property in the Philippines, buyers have several loan options to choose from that caters to their specific needs. Here’s a brief overview of the most common types of loans available:

Home Purchase Loans 

Home purchase loans are intended for buyers who want to purchase residential properties such as houses, lands, or condominiums or refinance their current and existing home loan from other banks. 

Banks often finance up to 80% of the property’s appraised value, with buyers required to make at least a 20% down payment.  Some lenders allow you to use the funds for renovations, and construction and these loans often come with flexible payback periods.  

Lot or Condo Purchase Loans

Lot or Condo Purchase Loans are specifically designed for acquiring vacant lands or condominium units. Buyers can obtain financing for up to 70% of the appraised value when purchasing a land or condominium. 

This option is great for individuals wanting to invest in land or specific residential units, allowing them to make a smaller down payment while still owning valuable real estate.

Construction Loans and Home Improvement Loans

Construction loans are short-term loans that you can use to build a home, while home improvement loans help people remodel or modify their current homes. These loans allow buyers to fund the costs of construction materials, labor, and other expenses associated with building or renovating their homes. The terms and conditions may vary depending on the lender and the extent of the project.

Refinancing Existing Mortgages

Homeowners with existing mortgages can opt for mortgage refinancing to get better interest rates or change their payment terms. This option lets them replace their current loan with one that may lower their monthly payments or shorten the repayment period. Refinancing can help save money over time and create more space in your monthly budget.

Bank Financing Requirements in the Philippines

To apply for a home loan, buyers must meet the specific requirements to ensure a smoother process. Here’s the list of the basic requirements for the application:

• Two valid IDs
• Marriage contract (if applicable)
• Proof of income (varies by employment type)
• Completed home loan application form
• Appraisal fee (for private listings)
• Unit computation for developer owned units
• Collateral documents, such as property title and tax declaration (for private listings)

Difference Between Selling Price and Appraised Value

It is important for potential buyers to understand the difference between selling price and appraised value, as the difference can affect the loan amount they can obtain. 

Selling price is the amount that the seller lists for the property to sell under current market conditions, while appraised value is an assessment of a property’s value at a certain point in time carried out by a professional appraiser during the mortgage process. 

Impact on Loan Amount

Understanding the relationship between selling price and appraised value, as well as how it influences loan amount, is critical in establishing how much loan a buyer can acquire. 

• Appraised Value Equals Selling Price: If the appraised value equals the selling price, the sale will proceed smoothly and the loan amount will be based on the agreed-upon selling price. 
• Appraised Value Exceeds Selling Price: If the appraised value exceeds the selling price, the loan amount remains unchanged. The buyer will benefit from instant equity, as the buyer is in a good position which means that they’ve agreed to pay the seller less than the home’s market value. 
• Appraised Value Falls Below Selling Price: If the appraised value falls below the selling price, lenders normally only finance up to the appraised value, so if the selling price is higher, the buyer must either pay the difference out of pocket or try to negotiate with the seller. If neither method succeeds, the sale may not go through.

Home Loan Requirements in the Philippines Based on Employment Type

When applying for a home loan in the Philippines, different types of borrowers must meet specific conditions to ensure a smooth application process. Here’s a breakdown of the requirements based on different types of borrowers:

• Locally employed
  • Pay slips (3 months most recent)
  • COE
• Overseas Filipino Workers (OFWs
  • Pay slips (3 months most recent)
  • COE or Job Contract
• Business owners/professionals:
  • Income Tax Return (ITR) and Financial Statements (2 months)
  • Bank statements (6 months)
  • Commission voucher (12-24 months) *For real estate brokers
• Freelancers/online workers:
  • Bank statements (6 months)
  • Job Contract or COE
  • Pay slip (3 months most recent) 
  • Certificate of Earnings (12 months)

Keep in mind that requirements may differ by bank and depending on what kind of financing you seek. For specific details, contact your chosen bank immediately. If a company applies for a home loan, additional documentation will be required. 

How Banks Assess Your Capacity to Repay

Before a buyer’s loan will be approved, banks will determine a borrower’s ability to repay based on income records and other financial information. The assessment process typically involves:

Verification of Income

Lenders would never lend money to someone who does not have a consistent source of income. Banks use income papers such as payslips, Certificates of Employment (COEs), and Income Tax Returns (ITRs) to verify a borrower’s wages. These documents establish a stable income, which is required to demonstrate the borrower’s ability to repay the loan.

Debt-to-Income Ratio

The debt-to-income (DTI) ratio is frequently used by lenders to evaluate a borrower’s financial stability. This ratio compares monthly debt payments with gross monthly income. A lower DTI ratio indicates that the borrower has enough income to cover both existing obligations and new loan payments. Banks typically favor DTI ratios below 40%.

Employment Verification

Lenders consider a borrower’s employment stability as part of the loan application. Locally employed individuals may prove employment security by providing a Certificate of Employment (COE) and recent pay slips. To establish reliable income, self-employed individuals or freelancers must have continuous earnings as evidenced by financial statements and bank records.

Credit History

Banks evaluate an applicant’s credit history to assess their borrowing habits and repayment reliability, assisting lenders in determining how manageable the applicant’s present debt is and whether they can make extra payments. A good credit score increases the likelihood of loan approval and can lead to more favorable loan terms.

Factors That Affect Your Loan Approval

It is important to have a long-standing relationship with the bank as it can help the buyer’s loan to be approved. Banks trust customers whom they know well since it gives them a clear picture of a buyer’s financial pattern, which often means better terms and faster processing of the buyer’s loan. Having an existing account or loans are typically viewed as lower risk, which helps speed up approval. 

A with a 20-year banking history at BPI and have several accounts for different purposes, experience faster loan approval due to the bank’s familiarity with their financial patterns. In contrast with their transaction with the PS Bank when they apply for a loan, they face a longer process for the approval of their loan since they have no prior relationship. The approval of their loan was delayed due to the lack of historical data that leads to a more extensive checking and verification. This example demonstrates how banking relationships can affect the speed and ease of loan approval.

Tips on Choosing the Right Bank to Apply for a Home Loan

Improve your Credit Score

A satisfactory credit score is essential for home loan qualifying. A higher credit score typically leads to lower interest rates and loan terms. Before applying, evaluate your credit history for any mistakes and work to improve it by paying bills on time and lowering credit card balances.

Compare Rates and Terms

Anyone looking for a home loan should compare lenders in order to find the best interest rates and terms. Compare offers from at least three different banks or mortgage providers. Pay attention to both the interest rate and the annual percentage rate (APR), which covers loan fees and other expenses.

Have a Long-standing Relationship with the Bank

An established relationship with a bank can benefit you. Long-term customers are often viewed as low risks by banks, resulting in faster approvals and maybe better terms. If you have any existing bank accounts or loans, use them to strengthen your home loan application.  

Evaluate Bank Reputation and Customer Service

Evaluating the bank’s customer service reputation, as a responsive and helpful lender can significantly improve your loan experience. Check previous customers’ reviews to see how satisfied they are and to ensure you will be helped throughout the process.

Consult with Experts

Consulting with a bank representative or loan officer is a smart move to understand the specific requirements for your situation. They can guide you on the necessary documentation, answer questions, and clarify any terms and conditions, ensuring you’re well-prepared for the loan application process.

Preparing for the Home Loan Application Process

Successfully navigating the home loan application process involves thorough planning and organization. Here’s a detailed guide for obtaining the essential documentation, understanding key financial requirements, and making sure your application is good before submitting it. 

Contacting Bank Representative 

Having a clear understanding of the specific home loan requirements is essential for a smooth application process. This is why reaching out to a bank representative is highly recommended, as they can provide detailed guidance, answer questions, and clarify any uncertainties about documentation and eligibility criteria. 

Organizing Necessary Documents

To avoid delays in the loan approval procedure, all essential paperwork should be gathered and organized ahead of time. To do it effectively, gather the necessary documents, make a systematic way of organizing your documents into categories and make sure that the collected documents are up-to-date and accurate.

Being realistic with your budget is essential when preparing to buy a home. A well planned budget helps the buyers to manage their mortgage payments, thus eliminating the risk of straining your finances. By setting aside funds for equity, taxes, and any existing debts, these steps create a financial cushion to the buyers that helps them manage unexpected expenses, experience a smoother application and financial security. 

Conclusion

The real estate industry in the Philippines is thriving, attracting both local and international investors. It is essential to know the different options in availing properties, such as bank financing and choosing the right bank for your loan application process. Understanding the requirements for bank financing is important for a faster and smoother application process. Many buyers face challenges during the loan application process, often due to a lack of preparation. By being well informed, buyers can enhance their chances of availing a loan and enjoy the benefits of owning a property. 

Take the first step toward owning your dream home. Feel free to contact us if you’re looking for a free home-buying guide or consultation. 

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