How much of a mortgage can I qualify for?

When it comes to buying a home, there are often other considerations beyond the cost of the home. You need to also consider whether you will be able to qualify for a mortgage and if you can afford monthly payments after accounting for all your other expenses. Whether you are looking at houses for sale or rent, lenders will want to see proof that you qualify for their financing.

If this is your first home purchase, or it has been quite some time since you last bought a home, likely, you might not know exactly what lenders expect when they review your application. Don’t worry – we’ve got all the tips on how much of a mortgage you qualify for! Keep reading to find out more. 

Mortgage Meaning

 A mortgage is a loan from a bank, licensed lender, or other financial institution to purchase a property. The agreement between a borrower and a lender gives the lender the power to repossess the property if the borrower defaults on the repayment as per the agreed schedule. The collateral, in this case, is the house in question.

A housing loan is a long-term loan that takes 10, 20, or even 30 years to repay. You must repay the amount borrowed plus interest at the stipulated time. On completion of the mortgage payment, the house fully belongs to the borrower.

Mortgage

Key Mortgage Terms You Should Know

Prospective property buyers will come across several terms that the lender uses when calculating how much mortgage you will get. Here are some of the main terms.

Annual Percentage rate(APR)

The annual percentage rate is the cost of the mortgage the borrower will incur. This includes the interest rate, discounts, and other fees that form part of the loan. The APR is higher than the interest and it depicts the true cost of the housing loan.

DTI (Debt to Income Ratio)

DTI is a measure of a borrower’s income that goes toward paying debts. For example, if a borrower has an income of 50,000 and they have total debts of 30,000, the DTI will be as follows:

30,000/50,0000 *100=60%. This means the borrower is using 60% of their income to pay debts.

Lenders use DTI to determine whether you will be able to pay for the mortgage. It is advisable to have a DTI of 36% or less.

Down payment

The down payment is the amount a buyer pays upfront for the property. Lenders will mostly give you 80 % of the money you need to purchase a home, and you will have to raise the other 20%. This 20% is the down payment.

In Kenya, some lenders offer 100% of the property value, while others offer 80% or 70%. The housing loan amount you will get varies from one lender to the next.

LTV (Loan to Value Ratio)

An LTV is the amount a lender offers a borrower in comparison to the total value of the property. For example, if the value of the property is Ksh 5,000,000 and the bank offers to pay Ksh 4,000,000 towards the mortgage, then LTV is 80%.

4,000,000/5,000,000*100=80%

Private mortgage insurance (PMI)

PMI is an insurance cover that protects the lender if the borrower fails to pay the mortgage.

Underwriting

This is the process the lender will run to assess the risk of giving the borrower the mortgage loan.

Property Appraisal

A property appraisal is a process of reviewing the property the borrower would like to purchase and giving the lender an estimated value. This is done by a professional valuer.

Cash to close.

Cash to close is the amount the borrower will need to pay. These include down payments and other closing costs.

Discount points

A discount point is money a borrower can pay in advance to reduce the interest on a mortgage loan.

Origination fees

The cost the lender charges for processing the mortgage

Mortgage types

 There are two major types of mortgages:

 Fixed-rate mortgage

 This type of mortgage has the same interest rate throughout the repayment period of your loan. Although the monthly repayment amount may change from time to time due to inflation and changes in taxation, the monthly repayments are pretty predictable.

Advantage

 It is easy to plan your budget as monthly payments are pretty predictable during the repayment period.

 Disadvantage

 You might pay more as interest accrues over time if the rates are high.

 Who is it for?

 If you are thinking of getting a permanent home, one that you will spend the rest of your life in, then this is for you.

 Adjustable-rate mortgage 

 This type of mortgage has varying interest rates depending on the market rates. They have a repayment period of about 30 years. 

The first step is to agree on an introductory period whereby you get a fixed interest rate, which is generally lower. Once the initial period ends, you get other varying rates that depend on the market interest rates. 

For example, if you sign up for a 30-year loan for the first five years, you get a fixed interest rate. For the next 25 years, you get varying interest rates depending on the market.

Adjustable interest rates have limitations within which interest rates cannot go above or below. This cap helps prevent the sudden hike of interest rates that would disadvantage you.

 Advantage

It provides relatively lower interest in the introductory period.

 Disadvantage

 If the interest rates increase, your monthly payments may also significantly increase. 

Who is it for?

 If you are planning to buy a smaller house that is not your ideal home as a placeholder, this is for you.

If you are planning on putting extra money towards repayment of your loan in its early stages, this is definitely for you. 

Factors influencing how much of a mortgage loan you qualify for

 A lender will consider various factors to determine if you qualify for a loan. These include:

Your income

 Your income determines how much you can contribute towards the mortgage repayments. The income must be regular and can be from your salary or returns from investments.

Lenders also consider the debt-to-income ratio, as this determines how much of your income is available to go toward your mortgage repayment.

The value and condition of the property 

Lenders want to ensure the property you are buying is in good condition and is worth their money. The lender will do an appraisal to get a read on the kind of home you want to purchase. If the property is in bad condition, they may be hesitant to approve the loan until the repairs are done.

The loan-to-value ratio determines how the lender is likely to approve the purchase of the property. This means you may need to raise some amounts, especially if they don’t give you 100% of the value of your home. 

 Your down payment 

The more you have for your downpayment, the less money you need to borrow. As a result, your monthly payments will be lower. Although some lenders will offer 100% of the value of the property, most lenders require you to raise a down payment of up to 20%.

 Financial history

The lender will look at your debt repayment capability. They will check you out in the CRB to ensure you’ve not defaulted on any payments.

 Work history

Lenders want to see that you have a steady source of income, as this means you can repay the housing loan. You need to show at least one year of steady work history.

Factors to consider when taking a mortgage

 Deciding to get a mortgage is an important step. That said, there are a few key factors that one should consider when taking out a mortgage. They include : 

Duration of the mortgage

 The shorter the repayment period, the higher the monthly payments but the lower the cumulative interest paid.

Interest rate

The lower the interest rates on the mortgage, the fewer payments you have to make each month. It is essential to pick a lender with lower interest rates.

Penalties and expenses

 What happens if you miss a mortgage payment? Will you be charged a fee? Will you lose your house? These are some of the questions you need to ask your lender before deciding to take out a mortgage with them.

Various hidden costs come with taking a mortgage. They include insurance, utility fees, taxes, legal expenses, valuation fees, etc. 

 Existing debts and expenses

 Your existing debts and expenses should be considered when taking out a mortgage. 

It would be best to consider future expenses such as kids’ college, house insurance, etc. 

Savings 

 When taking a mortgage, you must have money for your down payment and closing costs. If your savings are insufficient to cover the down payment, you may want to narrow your search.

 The documents you need when applying for a mortgage

  • Your national ID.
  • Your KRA pin.
  • Bank statements
  • Payslip for 6 months or more
  • A sale agreement
  • Valuation report.
  • Copy of title.
  • A copy of a marriage certificate if one is married and wants to get a joint mortgage with their partner.

 How to apply for a mortgage in Kenya

 Taking a mortgage can be overwhelming, especially if it is your first time.It is also a complex process that can take up to five months. Here are the steps you can follow to make your journey smoother.

1.Get an appraisal 

If you decide to go the mortgage route, then you have to start by approaching a lender and getting an estimate of how much you qualify for. Age, financial capability, assets, and credit details will matter and determine how much they offer you. 

You can try out different lenders to determine how much they can offer. You can then compare the various packages and choose the one you prefer.

Alternatively, you can use a mortgage calculator to see how much you can get from the lender. The mortgage calculator will give you an approximate amount you can access.

Once you get an appraisal, you must act fast, as the offer is only valid for a short period of time.

Also, note that the amount offered is an estimate and may not be the one you are given.

1. Select a home

After the appraisal, you will have a rough estimate of how much your lender is willing to offer. This makes it easy to choose a house. Ensure that the seller accepts mortgage payments. 

You can decide to search for a house on your own or look for a real estate agent.

  1. Send in your application

Once you’ve chosen a house, make a formal application to your lender of choice. They will need information such as your pay slip, bank statement, etc.

 It would be best if you were honest with your application, as any discrepancies may result in your application being disqualified. 

3.Mortgage Approval

Your mortgage will be approved after your lender has gone through your application and determined that you can pay off your loan.

Most lenders will offer a mortgage you can repay without spending half of your income. Here you can use your mortgage calculator to know the amount of money required to make monthly payments.

4.  Mortgage Disbursement 

Here, you will sign documents as you accept the terms and conditions of your loan for your dream home. This includes the repayment period, monthly contributions, and the aftermath if you default on your loan. 

Do not accept mortgage plans you can not service, as defaulting will cause a significant loss for you. 

5.  Buy your house

Once your finances are in order, you can contact the owner and complete your purchase. Complete the paperwork, and you’re all set.

The house ownership is transferred to the bank and will be transferred to your name once you complete all your payments. After this step, you’re free to move into your new house.

Conclusion 

To sum it up, getting a home mortgage in Kenya can be an exhausting process. Using a mortgage calculator will give you an idea of how much you can get. Once you figure out how much mortgage you qualify for, it will be easier to go from there.

An estimate will give you an idea of how much you can get, and you can find the right home that’s within your budget. Make sure you consider all the factors before you select the lender and ensure you get a property that is likely to appreciate over time and worth your money. 

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