Property loan – what to know about terms and options?

Source: Ksh, 02.2024

Creditworthiness – Can I Get a Loan?

The determination of creditworthiness determines both the amount of available mortgage loans and the subsequent installment amount. Therefore, it is essential to ensure the proper arrangement of elements that determine creditworthiness.

There are several factors that influence creditworthiness, let me show you these.

Bank Account

When assessing creditworthiness, the lending bank typically requests 2-3 months of bank statements. It’s important that the statements show identifiable transactions.

In case you have multiple bank accounts, it’s not advisable to hide any of them. Present all bank accounts under your name to the bank.

Additionally, there should be no overdraft on the account.

Proof of Employment

A minimum of three months’ proof of employment is required, excluding the probationary period. It’s advisable to time a job change after taking out the loan, so as not to prolong the credit assessment process.

Payment Arrears

In the case of existing loans, payment arrears do not reflect positively during the creditworthiness assessment by lending banks. These must be settled before related documents are presented.

Management of Existing Loans

In most cases, everyone forgets about their credit cards when applying for a loan. Credit cards are considered live credits during the assessment, so unused credit cards should be canceled. Similarly, there are certain types of loans, such as revolving loans, that continue to function as a credit line after full repayment.

It’s important to settle these because they will still appear as open items in the credit information system (KIR) for 1-2 months after closure.

Guarantor and Co-debtor Status

Transactions where you are not the payer but appear as a guarantor or co-debtor also appear in the KIR system. These are factored into the 33% of the net provable income, which represents the maximum burden on the applicant’s income during the assessment.

Guarantor and co-debtor statuses can arise from employer loans, government subsidies, personal loans, student loans, and overdrafts.

Entrepreneurial Status

You will need a certificate from the tax authority (NAV) stating that you have no tax arrears. It’s advisable to obtain this in advance, as the loan assessment will not proceed without it.

Equity

Prepare in advance to gather the required equity. Alongside personal equity, housing savings funds can help with this. Equity is not always necessary, so it’s worth finding out in advance whether it will be needed at all.

Real Estate Loan with or without Equity

The minimum amount of equity must be 20% of the offered property’s market value. The actual amount of equity is influenced by factors such as the property’s location, the presence of value-reducing factors (such as nearby entertainment venues), and the technical condition of the property.

However, equity is not always necessary. This depends on the purpose of the loan and the assets involved as collateral. For renovation or modernization, no equity is required. For such purposes, the bank provides up to 80% of the property’s market value (up to the amount of renovation costs).

In cases of favorable income situations, no equity is required for the loan, and in the case of additional collateral provided by another property, equity is also unnecessary.

Value of the Real Estate Loan Collateral, Market Value

The two terms do not mean the same thing.

Market value is the value determined by an appraiser. It reflects the current market value of the property. This is the price at which the property could be sold at that moment. Market value depends on many factors, including location, condition, year of construction, and other factors.

The collateral value is lower than the market value. Depending on banks and other factors, it represents 70-90% of the market value. For example, in a big city, the percentage deduction from the market value is smaller (the collateral value will be higher) than in a smaller town.

Both the appraiser and the bank approve the collateral value. This value indicates what the property could be sold for quickly (within 1-3 months) if needed. This assures the lending bank in case the borrower fails to pay the installment.

Mortgage Loan

Real estate loans are essentially mortgage loans, which can be residential or non-residential mortgages depending on the type of property.

Real Estate Loan or Purpose-Linked Mortgage Loan

Real estate loans include those loans that can only be used for residential purposes, such as purchasing new or used property, building new property, renovating, or expanding property. A special case is when an existing real estate loan is used for refinancing. In this case, an existing real estate loan is replaced with a more favorable one.

General-Purpose Mortgage Loan

General-purpose loans can be used for anything. These loans are not tied to a specific purpose for borrowing. Obtaining these loans is much simpler, often requiring only proof of income and property for the credit assessment.

Typically, this type of loan is chosen for loan amounts exceeding 10 million. The loan is tied to high-value assets or real estate. A mortgage is registered on the property, and in case of non-payment, the bank can auction off the property.

Conditions for Real Estate Loan Application

The process of taking out loans for real estate purchases has certain requirements, which are fundamentally similar but may vary slightly from bank to bank. In general, the following conditions are necessary:

• Age between 18 and 75 years,
• Permanent address/residency permit in Hungary,
• Proof of at least the minimum wage and a minimum of 3 months of employment, excluding probationary periods,
• In case of proof of the minimum wage, offering other real estate or assets,
• Availability of the required equity for the given loan,
• Co-borrower in case of higher loan amounts,
• Proof of income if wages are not deposited into a bank account,
• Zero tax debt certificate from the National Tax and Customs Administration (NAV) in case of entrepreneurship,
• For construction purposes, a valid building permit (with complete documentation and budget) and proof of land use,
• Asset insurance, which is assigned to the lending institution.

The process of taking out a real estate loan

The process starts with exploring the possibilities. It is advisable to review the offerings of several banks before making a choice. Do not rely solely on online calculators!

This may be followed by prequalification, and then, once the documents are submitted, the property valuation, credit assessment, contract signing, and disbursement.

The process typically takes place within 30 days, but it’s better to expect 60 days for the final disbursement.

For construction purposes, disbursement does not occur in a lump sum, and the work and material costs must be substantiated with invoices.

It’s worth looking into discounts when making a choice.

There is fierce competition in the loan market, which banks try to offset with various discounts.

One such discount could be an interest rate reduction, typically applying to a certain period and subject to certain conditions. One of the most common examples is directing the salary to a bank account or tying it to some group orders.

Another type of discount is the reduction of initial fees for taking out the loan. In this case, it is recommended to check the Total Cost of Credit (THM) to avoid any additional costs associated with this discount.

Loan repayment

Loan repayment can be done in three main ways:

• Equal principal payment (linear repayment),
• Annuity (equal monthly installment),
• Deferred principal payment (grace period, with housing savings).

In equal principal payment, the principal must be paid evenly, plus the interest on the outstanding principal.

In annuity repayment, the same amount must be paid every month until the end of the term. At the beginning of the term, the interest amount is higher, so it may seem that the principal amount is not decreasing.

With loans combined with grace periods, we get a deferment on the principal amount, which we do not pay during the grace period.

In case of difficulty with loan repayment, several solutions can be considered. You can request a temporary reduction in installments from the bank. Extending the term may also be a solution, as well as requesting a grace period for the payment of the principal.

Any of these solutions can be good. In case of difficulties with loan repayment, it is most important to inform the bank about the problem and find a solution with their help.

Real estate loan refinancing

There is also the option of refinancing an existing real estate loan. If one bank offers more favorable terms for an existing loan, it is worth inquiring with other banks about transferring the existing loan to them.

Whether it’s for your own use or investment purposes, a professional team awaits at the Kenway office for real estate loans.