Buying a home is a dream for the majority of people, but most do not have the necessary capital to make this investment, and credit can be the solution.
Home loans: what they are and what they are for
Home loans consist of obtaining financing from a third party, usually a bank, with interest on repayment. A mortgage is a loan to buy, build, renovate, restoring or expand a permanent or secondary residence.
Home loans are for private individuals, provided the banks’ risk assessment allows it. To decide whether or not to grant a specific mortgage, the bank considers the property’s valuation, the applicants’ age, income, nationality, employment status, family dependents, credit history, the existence of guarantors, other debts, and any other previous defaults. These factors result in a risk assessment that determines who can access the credit and the associated financial conditions, namely the loan amount and interest rate. In the case of a home loan for rehabilitation works and the analysis of the factors mentioned above, the bank also evaluates the construction budget in the credit risk assessment.
Loans for property acquisition are made available to borrowers when both parties agree upon the deed of purchase and sale of the property. In the case of a loan for renovation or development, credit is available in tranches, during a specific period, according to the inspections carried out by the bank and assessment of the construction plan.
Home loans are the type of credit most used by families
Whether for acquisition or renovation, home loans have two distinctive features that allow more people to access them: the term and the mortgage amount.
Home loans are usually taken out for long periods, which can be up to 40 years, depending on the age of the borrowers, to reduce the associated instalments. In addition, the legal terms give the lending institution rights over a property in case of non-compliance with the contract terms, thus reducing the risk associated with finance lending. However, banks have a limit concerning the amount they can lend, which is generally lower than 90% of a property evaluation value or deed and, as such, requires an initial equity investment.
Combining the two types of housing finance: purchasing and renovation
Buying a house that needs renovation may make a difference in the purchase price and even increase the negotiation margin with the property sellers. As such, it may be advantageous to combine both components in the same mortgage loan. Furthermore, considering that renovation usually increases a property’s market value, the final appraisal may substantially reduce the loan repayments.
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