Financing a residential property from banks is a great option as they provide assistance through various loans, schemes, and mortgage facilities. While applying for a loan it is important that you consider various factors like the interest rate, the term, and even the property for which the loan is to be acquired. Banks provide certain specifications for each loan. Land loans can be acquired only for residential property which is not under any construction activities at present. The banks provide home loans to properties that are constructed, under construction or to be constructed soon properties.
Banks also provide home construction loans for constructing homes through simple documentation, affordable and attractive interest rates with other flexible payment schemes. The article deals with some point in relation to financing your first rental property.
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How do banks verify owner occupancy?
The banks do not issue loans until occupancy certificates have been submitted. The local municipal authority issues this certificate within 30 days of application. The various documents that need to be submitted are:
- The certificate showing commencement of the construction
- Certificate showing completion of the home
- No objection letter for fire and pollution
- Building and sessions plan
- Tax paid receipt along with sheets showing tax assessment
- Photographs of the completed apartment along with photos of solar panel and rainwater harvesting facilities if necessary
- A copy of the sanctioned plan
- Calculation of the floor area which is to be duly signed by the architect
The verifying duties are carried out by Compliance Auditors that are hired by the bank. The occupancy certificate is not the same as a possession certificate and is important as it is necessary to avail facilities like electricity and water.
Is it harder to get a mortgage for a residential property for investment purposes?
Answering the question, difficulty in obtaining a mortgage to invest in residential properties varies from one property to another. It is comparatively difficult to obtain a mortgage for rental properties than for single-family houses and other investment property. A mortgage is a kind of loan which is provided by private individuals such as a bank, private money-lenders, credit unions, and mortgage companies.
Conventional mortgages have a fixed rate of interest and do not increase during the term of the loan. Since they are provided by private bodies, the procedures are stricter in nature. Only 10% down payment is enough in case of owner-occupancy properties and 20 – 25% down payment for other properties like the multi-family property.
How do I finance my first rental property?
Investments in rental property is a significant and profitable investment. Thus it is important to take some necessary steps while financing your first rental property. They are:
- Knowing what your end goal based on your investment capabilities and investment strategies. This step also includes taking advice from other landlords that are experienced.
- Saving up for your down payment. You will have to save a minimum of 20% as a down payment as mortgage facilities are not easily available for the rental properties. You should also select your rental properties best suited to your preferences within your budget.
- The next step is to evaluate the expenses that you may incur in the process. This can be inclusive of property tax, repair and maintenance, and other operational charges. Calculate your margins as well.
- The next step is to consider other financing activities along with cash. Investing through cash can enable you to attain a positive monthly cash flow while financing can give you better returns.
- In cases of financing your rental property, then it is important that you check for lower mortgage rates in order to eliminate extreme deductions from your monthly income.
One important way of financing your rental property is through seller financing wherein you obtain the ownership of the property and mortgage. The payment of the mortgage is given over to the seller as the purchase amount of the property. You can also gather a group of investors willing to invest, thus reducing your risk.
What is the credit score required for financing a residential property through a bank?
The credit score required to finance a residential property is generally between 650 and 749 for a home loan. They also check through your credit details before granting your loan. A credit score of 650 is considered a minimum for the approval of the loan. A credit score between 550 to 649 is considered as average and needs working upon. A credit score between 300 to 549 is considered a bad credit score. Thus it is important that you work on your credit score and your credit history to avail loan to finance your residential property.
How is EMI calculated for a Real Estate property?
The Equated Monthly Installment or EMI is a percentage amount that is payable depending on a person’s income. It is a fixed amount that is payable by the borrower to the lender on a monthly basis on a fixed date. The factors considered while calculating EMI is your occupation and the number of dependents. Then the bank calculates EMI based on:
- The Interest of the bank
- The time period within which you want the loan
- The amount that you apply as the principal amount.
The mathematical formula for calculating EMI is
- EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
- P stands for the loan amount or principal
- R is the interest rate per month
- N is the number of monthly installments
What are the documents required for financing through a bank?
The various documents needs for acquiring financial assistance from the bank for financing a residential property includes:
- Application Form which is signed along with photographs attached
- Your identity proof and your address proof such as passport, PAN card, voter card, driving license, bank statement or passbook, landline bill, etc.
- You are required to submit your salary or income proof.
- You are also required to submit various property documents such as Registered Sale Deed, Past Sale Deeds, House Tax Receipt (Latest), etc. The banks generally carry out an inspection on the property before approving the loan.
- In the case of co-borrowers, you are required to submit the same documents of that person.
The banks before giving out loans consider your credit scores, credit history, your salary slip and your accounts cash flow for the last six months. They also check through the validity of the documents submitted to them as security. All these activities are carried out to ensure the repayment of the loan and for the identification of the owner. (Read on Loan for developing a Residential Property )
Summing up, the banks provide various financing facilities for residential property. They offer loans, mortgages, and certain schemes which will aid the borrower. Before providing loan facilities, the bank checks the buyer’s occupancy through the appointment of an auditor who is responsible for the same. It is only after the occupancy is cleared the investor is made eligible for the loan. EMI or the equated monthly installment is a fixed amount charged by the bank after considering factors such as the income of the individual and the number of people dependent on him.