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Thinking of A Mortgage? Here's What You Can Do Now to Prepare
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Thinking of A Mortgage? Here's What You Can Do Now to Prepare

If you are at a point in your financial journey where you think homeownership is the next big thing to invest in, then getting a mortgage must have crossed your mind as one of the routes to achieving this dream.

A mortgage allows you to own your home so much sooner than you would have had you to wait until you have raised the entire amount to buy or build a house and at a cost that could be almost equivalent to your current monthly rent. 

Getting a mortgage also allows you to continue investing in other important projects in your life as it frees up the cash you would have spent financing the entire homeownership process whether through buying or building. 

That money could go to other investments that improve your net worth while you enjoy being a homeowner who pays just a little amount every month to eventually own their house. 

For example, if you choose the Absa Affordable Housing Mortgage option for houses below Ksh8 million, you enjoy a low interest rate of 9.5% p.a with a repayment period of up to 25 years. 

This interest rate is fixed for the first 9 years of the loan - which means you can enjoy rates far below the average 14% for personal loans across banks for 9 years and free your payslip to take advantage of other opportunities. 

Now, to many people new mortgages, the mere mention of this term may make one think of a lengthy, complicated process. But this perception only exists because of a lack of understanding on what one needs to prepare before beginning the application process.

Enough preparation will ensure you navigate the process smoothly and get the home loan that best matches your financial status.

This article aims to help you understand the steps you can take to prepare when thinking about taking a mortgage. 

What is a Mortgage 

A mortgage is a loan from a bank, or Sacco used to purchase or refinance real estate property. It is also known as a home loan. When you take a mortgage loan, the property serves as collateral for the loan, and you are required to repay the principal amount borrowed plus interest over the loan's term.

As per your agreement with the lender, you might pay a down payment of at least 5% of the house value, and the moneylender will cover the remaining amount with the promise that you will repay the money in installments over the term of the loan. 

Mortgage loans are usually repaid for 5 to 25 years depending on the loan agreement. Every payment you make earns you home equity until the last, when the house becomes 100% yours. 

Mortgage preparation ensures that you are in the right shape financially when applying. This can have multiple benefits, from helping you find the best lender and avoiding application mistakes that could cost you money to giving you an upper hand when discussing your loan terms.

With that in mind, let's explore how to prepare for a mortgage loan.

Preparing to Take a Mortgage: A Step By Step Guide for Kenyans

Talk to a Mortgage Expert 

Purchasing a home is a significant financial decision that can be overwhelming, but it doesn't have to be a solo endeavor. Working alongside a mortgage expert can make the process much smoother.

Mortgage experts have a variety of roles in the home-buying process. They can help you:

  • Make a Better Decision: An expert will help you understand the process and make informed decisions based on your income, circumstances, lifestyle, and home goals. 
  • Create a strategy and plan: A specialist will help you create a holistic and realistic plan that includes a budget to support your mortgage and home-ownership goals, the right mortgage at a competitive rate, and the flexibility to reassess it if something changes.
  • Find the best mortgage: An expert will help you determine whether you should buy a ready house with a mortgage loan or take a construction loan. What type of interest rate best suits you, and much more.
  • Ongoing help: An expert can offer you ongoing support throughout the process, ensuring that you understand the terms and conditions of the mortgage, find a property, and close the homeownership process.

A specialist can be a licensed financial advisor, a registered real estate agent, or a real estate lawyer. You should note that some mortgage lenders, such as Absa Kenya, can match you with a mortgage officer to hold your hand throughout the process. 

Restructure Your Finances 

When you apply for a mortgage, the lender will scrutinise your financial profile to assess your risk as a borrower. As such, you must take measures that will eliminate all red flags that might hurt your approval success by restructuring your finances. This will also ensure you don’t take on more than you can.

To restructure your finances when preparing to get a mortgage, you need to:

Lower your debt-to-income ratio - Lenders will typically gauge your ability to service a loan by how much surplus income you have. If much of your money goes toward debt repayment, you might need to lower your debts or increase your income.

Your Credit Report - To qualify for a mortgage, you typically need a stellar credit history. Consider getting a CRB credit report - you are entitled to a free report once annually - and ensure there are no errors. If there are, contact the relevant creditor to have this corrected. If your score is low, work on improving it to the levels your preferred lender would find good enough if not great.

Perform a financial checkup - This will ensure you are in great financial shape to take a mortgage. You should check the stability of your income, your insurance coverage, and if you are on track to achieve other objectives like retirement and saving for your kid's education.

Gather the Essential Documentation

During your mortgage application process, you will need to demonstrate to the lender that you are organised, responsible, and serious about obtaining a mortgage - which is really to mean, can you afford to pay? 

The documentation typically required includes proof of income such as recent payslips, employment verification; proof of assets such as bank statements or investment accounts, credit report and documentation of any outstanding debts or liabilities.

The existence of these documents isn’t enough; they must also be verifiable. Therefore, ensure that your documents are legit - typically, you will need to provide certified copies. Any inconsistency might hurt the success of your mortgage application.

Know How Much You Can Afford

When preparing to take on a mortgage, it is crucial to determine how much you can afford to borrow. Various factors come into play, and they reflect your capacity to repay the loan. When considering how much you can afford, you need to look at the following factors:

  1. Income: Your income will be crucial in establishing what you can realistically afford to pay monthly towards your mortgage. Note that the law prevents you from servicing loans with more than two-thirds of your monthly income. That is, the monthly installment for your mortgage added to the installments of any other loans you may have cannot be more than 2/3 of your monthly income. 
  2. Debts and Obligations: Monthly payments for credit cards, car loans, student loans, and living expenses will impact how much you can borrow.
  3. Credit Profile: Your credit score, borrowing history and the debt you owe will play a significant role in determining the mortgage interest rate you'll be offered, how much downpayment you will make, and how much money you can borrow.
  4. Debt Tolerance: It is crucial to consider whether you are comfortable with the idea of having a long-term debt hanging over your head for 10 or 20 years and to determine what level of debt you can realistically manage.

NOTE: Remember that the lender will determine how much mortgage loan you receive. They will conduct their independent appraisal to determine what you qualify for. So you want to give every reason to approve the amount you need. 

Save For a Mortgage Deposit

Saving for a mortgage deposit is essential when purchasing a property, as it represents the initial amount you need to secure a mortgage. A mortgage deposit comprises various expenses, including the downpayment, closing costs, taxes, and insurance. 

The down payment typically ranges between 5 to 20% of the property value, depending on the total amount you wish to spend on the house. Additionally, the closing fees can amount to another 10%, making the deposit a substantial sum.

It's worth noting that some lenders offer 100% mortgage financing options. For instance, Absa Home Loans provides 100% financing for loans below Ksh10 million and a Construction Loan if you already have a plot with a title deed. 

Saving for a mortgage deposit is a wise financial decision that reduces the total interest paid over the life of the mortgage, lowers monthly payments, and increases your chances of securing a mortgage. To save for a deposit, consider opening a goal-saving or high-return savings account such as Absa Digital Savings Account, investing, and increasing your income.

Apply and Get Pre-Approved For a Mortgage. 

Once you have your documentation and finances ready, you can shop for a lender. Typically, you will start with your bank or Sacco. However, some banks such as Absa, offer mortgages to their customers and non-customers. Therefore, shopping around is vital to ensure you get a deal that best suits you.

Once you find a lender, you can start your application process. The lender will typically conduct an appraisal to decide how much you qualify for and how much you need to pay in downpayment. Once they’re done, they will give you an offer that you can accept, negotiate, or turn down. At this juncture, involving a real estate expert can help you get a good deal.

Once you accept the offer, the lender will approve you for a mortgage loan, and you can move to the next step, finding a house to buy or start construction. 

Find Some Home Options and Select Your Choice 

After receiving mortgage approval, the quest to purchase a home begins. You can now go to the market and start looking for a property - if it is a straight purchase mortgage you are going for. You can consider different paths including taking a construction mortgage that some argue can significantly lower the costs as opposed to purchasing a ready unit. 

If you are taking the construction route, you can start looking for land to buy or take the mortgage and start constructing your home.

Once you find a property, your lender will conduct an appraisal to determine its value. If everything ticks, you will need to put up your down payment, and the lender will pay the remaining balance. Remember that the house title and documents will be transferred to the bank, which will hold them as collateral until you repay your mortgage. 

WRAPPING UP

Taking out a mortgage is a significantly life-changing financial commitment that requires careful consideration and preparation. Preparation allows you to understand the steps involved and mistakes to avoid, increasing your chances of approval. 

It is essential to be realistic about what you can afford and prepare for the possibility of being turned down. Remember that obtaining a mortgage is a long process that may require you to restart or reconsider your options.

By staying informed and focused, you can confidently navigate the process and secure the home of your dreams with a mortgage that suits your needs and financial capability.

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