Undoubtedly, acquiring one's own home represents one of the most significant decisions in the lives of many people. This fascinating journey begins long before selecting the perfect apartment or house. The challenges and opportunities in the Mallorca real estate market demand careful preparation and at least a basic understanding of the financial planning required for it. Step by step, from evaluating your budget to understanding the detailed "mysteries of mortgages," we will provide you with advice and some tools. Are you a first-time home buyer for personal use and permanent occupancy? Here and now, we offer you a small guide designed for you, intending to help you approach this process with confidence. Go for it!
How do I take the first step? The key is to understand how much we can invest in our new home. This process involves dedicating time to thinking and planning. We start by analyzing our incomes, current expenses, and potential savings capacity. Here we provide a series of simple steps to calculate our budget:
1. Evaluate our Monthly Incomes: We add up all our sources of income, whether it's salary, additional income, and, if applicable, the financial contribution of my partner or family members.
2. Review our Expenses: We make a list of our monthly expenses (ALL, every penny of our monthly expenses, including coffee, beer, etc.), both fixed and variable. This will give us a clear view of how much we can allocate to the payment of a mortgage.
3. Estimate our Savings Capacity: Based on the incomes and expenses we previously noted down for 30 days (at least), we calculate how much money we can save each month. The savings we have are fundamental for the down payment on the property.
4. Plan how to Address Future Expenses: Remember that owning a home entails expenses that we didn't have before; such as taxes, repairs and renovations if necessary, beautification (yes, it's always good to give the house a little something!), maintenance, and insurance.
Remember, being realistic with your budget is key to avoiding financial problems in the future.
If nobody has told you before, we'll tell you: we must understand what banks look for when granting loans. We explain some key aspects that we must take into account.
a) Internal Bank Policies: Each bank has its objectives, historical moments, limits, and credit policies, which can affect the ease or restrictions with which they approve a loan, the interest rate, and other terms and conditions of it. Therefore, before starting this journey, let's find out if our bank is the one granting loans more easily and with better conditions or if it's time to try another entity.
b) What Situation and backing do we have at a Personal and Family Level: First of all, we have to see if the bank or entity where we want to request a loan knows us or knows our family. Do we operate with them regularly or are we new customers? In the same line, they will consider factors such as the number of people depending on us and our marital status. If we are married applicants with children, we could have different considerations regarding the ability to pay compared to someone single.
c) Our Credit History: Yes, of course. Not always a bank wants to be the first to lend to us... so check the credit history to evaluate our previous payment behavior. Therefore, a good credit history is decisive. A history without defaults and good management of previous credits will be beneficial; having a good record of paying debts and bills. We can check if we are present in any of the debtor files in Spain.
d) Savings and Own Funds: They will take into account the amount of savings and initial capital that we, as applicants, can contribute. Except for special credits, linked to some government program or target audience of the credit institution, commonly, banks ask that as buyers we contribute at least between 20 and 30% of the value of the property to be purchased. For a house of 250,000 euros, the bank could require the applicant to contribute at least between 50,000 and 75,000 euros. Do we take into consideration the notary, tax, and management expenses? We will answer this in the next article.
e) Job Stability: As applicants, our employment situation will be analyzed, preferably with a permanent contract or a history of stable employment. Generally, applicants with indefinite contracts and several years in the same job are highly valued.
f) Ability to Pay: Banks evaluate our monthly incomes and compare them with our recurrent expenses, starting with our pre-existing debts. Usually, the mortgage installment should not exceed a percentage of the monthly net income, often around 30 to 40%. Check the mortgage simulator available on the website of any national bank.
g) Debt-to-Income Ratio: The percentage between the total debts of the applicant and their incomes is calculated. Risk assessment services of banks in Spain calculate 35% of net incomes.
h) Property Value and Appraisal: Banks conduct an appraisal of the property to ensure that the loan amount does not exceed its market value. If the property is valued at 300,000 euros, the bank will not offer a loan greater than that value. Some entities have preferences or restrictions on the type of properties they finance, including location. In some towns and cities, properties in central or developing areas may have a more favorable valuation.
i) Age and Loan Term: Our age as applicants at the end of the loan must not exceed a certain limit. This affects the maximum term of the loan.
To be continued...