Home loans can be used to build or buy your dream house. You can also use a home loan to repair or expand your already built house and assist your housing projects through necessary funding. Additionally, home loans enable homeowners to restructure their current mortgage with a new loan from another bank, a financing company, or a developer's internal funding. Many banks provide attractive home loan offers to new and existing homeowners. They provide reasonable rates and flexible periods that won't strain your money or spending plan. However, before getting into that, let's first understand a home loan.

What is a home loan?

A housing loan, commonly referred to as a home loan, is a loan amount that a person borrows, typically from banks and other lending institutions, to buy or repair their housing property. Depending on the loan's terms, the borrower must repay the loan balance plus interest in easy monthly installments or EMIs. A home loan is the most sought-after financial choice for buying a property in the Philippines. Because most people cannot afford to pay for the purchase in full cash due to its expensive nature, they are, therefore, required to obtain a mortgage from a bank, credit union, etc. There are also specialty mortgage lenders who lend money to borrowers with limited resources.

The Pag IBIG fund Housing Loan is the first option that comes to mind while researching the finest home loans in the Philippines. Most locally employed Filipinos and overseas Filipino workers choose this route to acquire a home for their families or as an investment because the government approved a minimum loan amount of ₱100,000, which has now accumulated to around ₱63.75 billion in home mortgages through this scheme.

What are the major types of home loans?

Buyers looking for home purchases, whether personal or financial, have access to various home loans. Although each type of home loan is unique and has its benefits, they all generally work similarly. Home purchasers can considerably benefit from applying for and obtaining mortgages in several ways. For those who want to buy a new home, there are many types of home loans accessible. They consist of jumbo loans, conventional loans, fixed-rate loans, adjustable-rate loans, FHA loans, and VA loans. The unique objectives of the housing loan borrowers, financial position, and loan purpose will determine which type is ideal for your housing loan requirement. Below are some of the types of home loan products popular in the Philippines.

Fixed-rate home loans

Fixed-interest housing loans are available in various loan lengths. As the name suggests, they come with a fixed interest rate for the whole term of the loan. Most of these loans come with a tenure range of 15 to 30 years. With refinancing as an exception, the interest rate of such loans never alters. Because, unless you refinance, a rate that has been locked in won't alter for the duration of your mortgage. Therefore, the monthly EMIs for such loans are generally consistent. While planning your budget, you can assume these payments to be consistent. However, the total you pay each month may vary slightly owing to changes in the cost of your insurance and your property tax declaration for the real estate.

Applying for this loan can significantly assist you with long-term planning and budgeting. However, there is a drawback. If the interest rates decline, you can lose out on thousands in cost savings, but the reverse is also true. You might save thousands if the rates rise, which makes this an attractive option.

Conventional loans

Unlike other housing loans, such as those offered by most banks, conventional loans are not backed by any government organization. Instead, they adhere to strict income and down payment specifications set forth by private financial lenders. Normal terms for conventional loans are 15 or 30 years. These loans come with very high-interest rates and are generally taken by borrowers who cannot apply for a loan anywhere else. Borrowers with a bad credit history are most likely to get approved for these kinds of mortgages because of their limited prerequisites.

Loans with adjustable rates

Housing loans with adjustable rates begin with a low fixed interest rate before switching to variable interest rates that fluctuate throughout the loan. Simply put, these loans start with a fixed interest rate for their starting phase (generally between one to seven years). However, as the period ends, the rates are adjusted per the industry standards, and interest payments that you can anticipate paying over the life of your loan change accordingly. The parameters mentioned in the loan agreement and market conditions determine how associated interest rates fluctuate. Adjustable-rate mortgages will have lower interest rates when market rates are lower, helping borrowers save money. However, borrowers should be prepared to pay more in interest if market rates rise from the level at which the loan was taken out.

Therefore, loans with adjustable rates might be a suitable choice if the loan purpose is to purchase a starting house before relocating to a more permanent residence. You can save some money upfront if you don't intend to live in a home for the entire loan period. Therefore, they are the best option for borrowers who constantly relocate due to their employment or are unsure of what they want in a dream home.

VA loans

VA loans are given to borrowers who have served in the military, are proud members of the national guard, or are currently doing so and their spouses. Veterans, active duty service proud members, and qualifying family members can use VA loans to help finance affordable homes and mortgages. Due to this, borrowers must fulfill minimum service requirements to be eligible. However, if you do, you'll be able to finance the entire cost of a home and get better interest rates than you may otherwise be able to get under a conventional loan. Although lenders are free to set their criteria for these loans, the conditions are often more accommodating, and borrowers with less-than-perfect credit may still be eligible. The option to buy or refinance a property with no down payment is just one benefit that a VA loan offers, along with some of the lowest interest rates available.

FHA loans

FHA loans are a type of government-backed housing loan that helps first-time home buyers with less-than-ideal credit scores and low cash reserves that can be used as down payments on homes. Remember that these mortgages have maximum lending limitations, so homebuyers and investors intending to purchase high-priced properties may be better served with a conventional mortgage. Additionally, remember that FHA requirements are tighter than those that this government agency uses for single-family houses if you're planning to buy a condominium.

Combination loans

A combined mortgage may be able to aid borrowers who need assistance making the entire 20% down payment. Combination mortgages essentially combine two loans: one for the down payment and one for the actual cost of the home. Borrowers can avoid paying for private mortgage insurance using this financing. However, until you refinance or pay off the down payment loan, you'll also have to pay for two separate loans if you take out a combination loan.

Jumbo loans

Consider getting a jumbo loan if you're a borrower planning to buy a luxury or high-end house that costs more than ₱650,000. These mortgages do not have the same restrictions as conforming loans, but they frequently have comparable loan maturity rates for suitable applicants. Of all, you can't just show there and demand to be treated like royalty. Jumbo loans have higher requirements than mortgages for lower amounts. To be eligible, borrowers often need excellent credit, make substantial down payments, have high incomes, and have low debt-to-income ratios.

USDA loans

The USDA loans are intended for buyers who purchase properties in eligible rural areas. These loans may have low interest and no down payments because they are primarily created for low-income earners with bad credit. The borrower's credit score and income restrictions are often less stringent with these loans. Apart from that, they can be used to finance up to the home's full purchase price. But you must be aware that these loans have certain income limits depending on the area's median income limit.

How to apply for a home loan in the Philippines?

It takes time, work, and a little bit of luck to find an ideal house. Once you've located a dream home that fits your needs and budget, it's time to take the next step toward homeownership by submitting a housing loan application form. Although purchasing a dream home is one of the greatest financial decisions you will ever make, being prepared with the necessary information will put you ahead of other prospective buyers. Filling out the papers isn't typically the first step in the mortgage application process. Before you get there, there is a lot of preparation to do. The more you plan, the better off you'll be as you reach each application-related milestone and attempt to close on a home. The following are just a few things you'll want to take care of before getting started, whether you're a new homeowner or seeking to switch residences.

Check your credit rating

Lenders will inquire about your credit rating and check your credit score to ensure it's in excellent standing as you prepare to begin the mortgage application process, even if you are self-employed. For future mortgage applications, every lender normally has a minimum credit score.

Conduct the necessary research

You should determine early on in the mortgage application process if the lender you choose is the best fit for you. Since a mortgage may last up to 30 years, the relationship is crucial. Do your research and pick the lender who can best meet your demands.

Choose the mortgage product

There isn't a universal mortgage product for today's homebuyers. Lenders provide various mortgage products for different loan purposes to satisfy the needs of a wide range of clients. Therefore, you will come across various facts when selecting a lender and a mortgage. The key is to look for the mortgage product that best suits your needs.

Assemble your paperwork

During the housing loan application procedure, you'll need to present evidence of your creditworthiness and persuade a lender that they can rely on you to repay hundreds of thousands in debt. This documentation will demonstrate that you have a reliable source of income, list your assets, and detail your financial commitments and debts. Prepare these required documents before beginning. Whether you are self-employed or a government employee, the procedures hold the same for both parties.

Obtain pre-approval from various lenders

You can get a general notion of your borrowing capacity and the type of mortgage you'll have with pre-approval. Do this before submitting an offer on the house, so the seller will know you have the bank's support.

Complete the housing loan application process

Once you've created the framework, you can start the mortgage application process. Remember that when you enter the housing market, you can be up against other purchasers for the same house and bargain with the seller for your best price. A seller's market entails higher asking prices and concessions, but the new homeowner will typically benefit from cheaper costs and stronger negotiating strength in a buyer's market. Use the procedures below to obtain a mortgage and find your next house while keeping the current property market in mind and after finishing your preparations.

• Propose the loan. The application procedure can begin when the seller accepts your offer after you've located the home of your dreams. This means that your offer likely outperformed those of other potential homeowners. All that's left is to obtain the funds before the closing date.

• Select a lender and fill out an application form. You should know where you want to get your mortgage because you have already looked into several lenders, or at the very least, the list should have been narrowed down to a handful. Take this opportunity to complete your research on the cheapest interest rates, lowest fees, and most advantageous loan terms. Obtain estimates from various lenders. Once you are sure, you can fill out the loan application form for that respective lender.

• Confirm the loan amount. It is important to examine the loan amount offered critically before making a final decision. Interest rates, expenses, fees, and loan length are included in loan estimates. Select a lender you are confident in.

• Await the processing and clearing of the loan. Be patient as this process takes some time, and be prepared to answer any inquiries or requests for additional information from the lender. You'll hasten the process by responding quickly.

• Finalize the mortgage. The time to close has arrived after all of the meticulous work. You then go over your final statement and sign the necessary documents. The keys to your new home and the loan are now yours to return.

Home loan requirements

You must demonstrate your creditworthiness to lenders during the application process by submitting legal and verifiable paperwork that justifies your financial caliber. This includes documents like:

• Latest tax declaration certificate.

• Current pay stubs or other income documents to substantiate your yearly income.

• Document showcasing your rental history.

• Residential house documentation, if any.

• Latest income tax return.

• Loan statement, if you have any ongoing loans.

• Latest bank statements for the past 6 months.

• Latest audited financial statement.

• List of your assets and debts, if requested by the lender.

Apart from that, a signed copy of the sale and purchase agreement between the seller and the buyer, bank statements, and, if necessary, income documents that explain credit blemishes like late payments, latest income tax return, run-ins with collections, and other audited financial statements are additional paperwork you should have on hand because the lenders might ask you to present such documents in some cases.

How to repay a home loan debt?

Equated monthly amortization installments are the first step in loan repayment once you apply. EMIs, also known as equated monthly installment, is the most used financial instrument to pay off mortgages. You must pay this set sum to your lender regularly until you have fully repaid your mortgage. Your EMIs will be due on a set day every month, such as the third of the month. You must continue making EMI payments until you have repaid your house loan. Upon loan maturity, your interest and some of the principal are repaid in each EMI. Although the EMI is constant for the duration of the loan, it has a greater interest component and a lower loan repayment component in the beginning years. The auto debit arrangement flips as you get closer to paying off your mortgage. This means the principal repayment portion of your EMI increases while the interest portion decreases over time.

The timing of your monthly amortization EMI payments has a significant impact on your financials. If you have a job, the date of your EMI should match the date of your paycheck. Make sure you have the money in your bank account, if you are self-employed, to cover the EMI payment. Your credit score is safeguarded, and extra fees associated with late payments are avoided if you make your EMI payments on time.

To determine how much of your gross monthly income is set aside for loan repayments, together with your account officer, use an EMI home loan calculator together with your other loan EMI installments or existing housing loan. It is suggested to keep your loan payment at no more than 45% of your gross monthly amortization. If you plan your cash flows wisely and stick to them, paying off your house loan can be simple, stress-free, and handy.

Pros and cons of home loans

A common desire many individuals never achieve in their lifetimes is owning a home. To amass the necessary funds to purchase a home, one must spend time, work, and forgo several aspirations. Not so many people have the opportunity of saving enough money to purchase a home. People who want to own home ultimately take out a mortgage loan. One must perform a thorough investigation before determining whether to apply for a house loan or not. Here are the pros and cons of home loans.

Pros

• Enables everyone to own a home. A typical middle-class paid person can now more easily afford to buy a home thanks to the home loan. Home loans normally have a long term of between 15 and 20 years, so the EMI is lower and more manageable. So you can experience the thrill of homeownership by obtaining a loan.

• Provides practical means of obtaining credit. A home loan has a lower interest rate than other types of borrowing, such as a personal loan or a gold loan, which is one of its main advantages. This is so the lender can use the property you want to buy as collateral for the loan amount. Although they vary from lender to lender, home loan interest rates are the lowest of all other forms of loans, and they take a little of your gross monthly income.

• Provides a mandatory method of saving. You might consider your money toward the EMI as a saving rather than an expense. This is because once you have fully repaid the loan, you will own the house, which will appreciate the appraised value at the end of the loan term.

• Ensures the property's safety. Since purchasing a home is a once-in-a-lifetime investment, you undoubtedly want to ensure the property is free of any outstanding legal matters. Here, getting a home loan can be a huge help.

• Provides an economical option for borrowing. Mortgage interest rates are typically lower than those for other forms of borrowing. Various mortgages, including fixed-rate, tracker, and reduced options, are available from lenders. Finding a specific mortgage arrangement that fits your needs and is also an inexpensive choice is achievable.

• Provides tax benefits. Mortgage borrowers are eligible for income tax breaks. As one pays interest, the amount of tax that must be paid to the government decreases as the amount paid in interest is subtracted from the total amount owed in income taxes.

Cons

• Creates a large amount of debt. By getting a mortgage, you agree to repay a sizable sum of money with interest over an extended period. You will pay back more than you borrowed, even over 25 years.

• Attracts various charges. There may be a surprisingly large number of extra fees in addition to the interest you pay, such as valuation fees, remortgaging fees, and conveyancing costs.

• Creates a risk of repossession. Homeowners will have their property repossessed if they cannot make the payments from their gross monthly income. You need to contact your lender immediately if you cannot make your mortgage payments on time. You might be able to get some support from them, or you might lose your house.

• Increases the total cost of your home. The monthly payment you make might seem fair, but the overall amount you must repay over time is substantial if interest is considered.

• Creates a risk of loss. Events like divorce, a severe sickness, losing your work, and accidents can cause severe financial hardship and impair your ability to manage the loan's burden, ultimately leading to the loss of the property. If you default on the loan, the lender has the right to seize and sell the property to recoup the money they loaned you for the mortgage.

Legal regulation of home loans in the Philippines

According to the Lending Company Regulation Act of 2007 in the Philippines and the Bangko Sentral ng Pilipinas, a lending company may make home loans in the amounts and with the acceptable interest rates and fees that the lending company and the debtor may agree upon.

All loan applications must have general conditions that specify each party's legal obligations, as the SEC requires. Clear communication is required regarding the collateral, interest rate, payback timetable, and security for the loan. The agreement must be by both the Truth in Lending Act, Republic Act No. 3765, and the Consumer Act of the Philippines, Republic Act 7394, to be deemed genuine. The Bangko Sentral ng Pilipinas financial board may determine an interest rate if it is warranted by the political, social, and economic environment, in cooperation with the SEC and the lending sector.

The actual cost of a home loan

Since the interest rate is the major factor determining what you'll pay, many borrowers pay attention. Unfortunately, they frequently disregard a wide range of additional criteria determining how much your mortgage will ultimately cost. The borrower must budget for additional expenses, in addition to the appraised value, including taxes and insurance, which are frequently included in the monthly mortgage payment and the mortgage costs themselves.

Typically, there are several expenses to several additions to the minimum loan amount, including application fees, appraisal fees, title search fees, loan application fees, and several smaller fees for things like house inspections and filing legal income documents. However, some lenders might try to increase their fees to generate more income, especially if they initially offered an unusually low loan maturity rate.

What would the true cost of your mortgage be then?

Generally, closing expenses and other loan application fees range from 2% to 6% of the minimum loan amount. The range is wide because fees and policies vary from state to state and lender to lender. States with higher tax declarations are more likely to have higher rates.

The fees that the seller and buyer of the home cover will also affect your pay. Even though many of these are determined by local conventions, they can also be bargained as part of the sales agreement, so that's where you should start when estimating your mortgage payments. Your mortgage payment will be lower the more closing costs the seller agrees to pay, and you are more likely to obtain such terms in a market where there are more properties for sale than there are buyers, as there are currently.

The loan amount will be significantly more than the buying and selling price. This is so that the loan's interest expense can be added. For the duration of the loan, the interest amount you pay is accumulated every month. Lender fees are also included in the minimum loan amount. Closing costs and any additional fees levied by the bank to obtain your loan should also be factored into your overall cost calculation. Here, you can contrast lenders. The costs the lender charges to execute the loan application are known as closing costs. When the contract is signed, the buyer pays these fees, typically between 2% to 5%.

Multiply your principal amount by your annual interest rate. For instance, if you borrowed ₱100,000 and your yearly interest rate was 5%, you would multiply ₱100,000 by 0.05 to get ₱5,000. This represents the annual pre-tax cost of your loan.

Conclusion

You can quickly become a homeowner with the help of a house financial loan. If your income is respectable and stable, you might be able to move into your house much sooner with a minimum loan amount. To own a home, you do not need to pay the full selling price. You can obtain a mortgage to move into your new home and repay the remaining 70% of the home's worth over a 15 to 20-year period if you have a 30% equity payment plus the money to cover closing costs.

Additionally, home loans allow you to establish a solid credit history that you can use to qualify for future consumer credit. Making on-time loan repayments establishes your reputation as a reliable borrower with good credit.