Preparing to buy a house the smart way

I practically lived my life in my parent’s house. I wasn’t inclined on getting my own house since I was living in my own comfort zone. My family shares the house only with my dad who most of the time is in the province and stays with us once in a while. A year and a half ago, I surprised myself by deciding to buy a property. Our new house is currently being built there and in a few months we will be moving in.

I believe that financial preparation for property acquisition is essential in ensuring a healthy cash flow. Before anyone engage into a property purchase, it is important that the financial position must be determined. If cash is available for an outright purchase, then this wouldn’t be a problem.

Now, why do people engage in mortgage even if they are awash with cash? Simply because cash is king. Paying in cash spares you from monthly headaches. However, getting the property outright makes you house rich but also cash poor. Liquidity is very important since no one knows when an emergency will occur or an investment opportunity will pass. Every peso paid for the mortgage is also a peso less for your wealth accumulation. You may have been freed from the interest but you lost the opportunity to invest that same amount that will yield you a higher return.

If you are getting a house thru mortgage, you need to know if you can meet the obligations that it carries. It’s unfortunate that there are people who jump in blind or simply ignore the rules of personal finance. They only realize the difficulties when their payment begins and their cash flow gets affected.

The first financial hurdle for a mortgage would be the down payment. You should have a “significant” cash deposit before you start considering on getting a new house. When the down payment is addressed, the monthly amortization (for the balance) must be thoroughly considered. The monthly amortization is overlooked at times. However it is more diligent to pay attention to this since this gets the bigger cut on the cash pie. How do you determine your capability for paying the monthly amortization? Your personal net worth must be established and the 30% debt rule must be applied. You can start by listing your regular income and outstanding debt. If you are married, you can include your spouse’s income as well (assuming that he/she will help you for the purchase). Your debt listing must cover all your financial obligations including credit card purchases, loans and scheduled payments like insurance premiums etc.. A personal finance rule states that your total debt must not exceed 30% of your total income. This rule intends to protect you from going cash strapped as your monthly amortization kicks in.

Let’s make an example. Stephanie is a typical yuppie. She is 25 years old, single and is currently earning P100,000 per month. She has been prudent in her savings and has no outstanding debt. She saw a property in Tagaytay and is inclined to purchase it. The property’s worth is P5 million and the developer allows her to deposit 20% of the total contract price and pay the rest in installment with an interest of 10% per annum amounting to 37,000 monthly for 10 years. She examined her bank account and found that she can cover the down payment. She has no outstanding debt and thinks that she can cover the mortgage. So is she capable of paying? The answer is no. If the 30% rule is applied, then the maximum monthly amortization that she should get is only P30,000. If she really wants the property then she should negotiate with the developer for a longer payment term or a lower interest rate. Aside from the down payment and monthly amortization, she must also consider the other cost of owning the property such as taxes, repairs, furnishing and homeowner’s dues. The 30% rule gives her the leg room to address this other incidental expenses.

Needless to say, you should always shop for the best deal for your mortgage. For a development project, you should check if it can be funded thru a government housing loan (thru PAG-IBIG) since this carries a lower interest rate. In case PAG-IBIG housing loan is not applicable, you may want to check around the different banks and compare their loan packages. There are also property developers who offer in-house financing. The 0% interest deal is now common during the pre-selling stage. Some even provide mortgage flexibility by allowing balloon payment. You should ask your sales agent the different payment schemes and choose which one suit you best.

Lastly, location is of primary importance. Check if the property’s location is pristine and does not fall to any nature hazards such as fault lines. It will also be diligent on your part to check if the property is titled properly. If you are getting the property from a developer, make sure that the property developer can be trusted. Remember, you are putting a significant amount on the hands of your developer so make sure you choose only from those that have good track record.