What are Home Loans?
Home loans, also called housing loans, are funds provided by a financing facility for different things related to housing. This can be in the form of the following:
- Buying a residential house and lot, townhouse, or condo unit
- Purchasing a fully developed lot
- Constructing a house on a lot you already own
- Renovating or refurbishing a residential unit you own
- Refinancing an existing housing loan
- Mortgaging an existing property to use the funds for other needs
Upon successful application of a housing loan, you will agree with the financing body for the amount of money you need to buy the property. This sum of money will be paid over a specific time (typically years), with interest, to the bank or agency you loaned from.
Most housing loans provide around 80 to 90% of the property cost, so the remaining sum must have been paid already by the buyer upfront as a down payment. Of course, all of these terms shall be discussed with you before sealing the deal. Here’s what you can expect once you avail of a home loan:
Aspects of a housing loan
This is the money you are required to pay upfront when buying a house. This is something you can’t rely on housing loans to finance, so it’s best to save for this before applying for a housing loan. The higher the down payment you shell out, the less money you will need to loan and pay for.
This refers to the amount of money you will be paying every month over a fixed period. Monthly payments are calculated by adding your annual interest to the total loan amount and dividing it by the number of months you will be paying it over (for instance, 120 months for 10 years of payment).
Banks don’t usually approve monthly payments that exceed 40% of your gross monthly salary, so you have to consider this. This is known as the debt-to-income ratio (DIR), and it’s important to note that this includes any existing loan you may already have.
This means that if you have any outstanding loan obligations, such as cash loans, car loans, etc., this will be deducted from 40% of your gross monthly income. Therefore, it is advisable to settle all your outstanding debt obligations before taking on a housing loan to ensure that your DIR reaches the required threshold.
This refers to how long you will be paying the loan. With a higher loan tenor, meaning a longer time to pay off your loan, you can also expect higher interest rates.
Type of interest rate
There are two kinds of interest rates you can usually choose from: fixed-rate and floating or flexible. Interest rates for housing loans change regularly, depending on the overall borrowing rate.
A fixed-rate means that you will pay the same interest over the duration of your loan, after which the loan rates will be reassessed. Using flexible rates means that the interest you will pay will change depending on the current market rates.
Why Avail Home Loans?
Buying a new house isn’t just what a housing loan is for. You can also use it for other matters related to owning a residential unit, such as the following:
Financing a home purchase is the most common reason for Filipinos to avail a housing loan. Banks offer this, government agencies (Pag-IBIG), and even real estate developers themselves. A housing loan for financing a home purchase usually entails buying a house and lot, buying a lot itself, or buying a living space like a condominium unit.
Unlike home purchase, where the house is already ready for occupancy, you can also use a housing loan or home improvement loan to construct your own house. This is usually used to finance different expenses involved with house construction, such as buying construction materials, paying for various permits, and paying for labor.
If you already have a residential unit but you are looking to renovate or refurbish, that’s possible with the use of a home improvement loan. You can use this not only to redecorate or renovate your house but even to fund extending the house or building additional rooms.
Home equity loan
We usually associate home loans with funding the purchase of a new house, but a home equity loan is kind of the opposite! Here, what you’re doing is you’re borrowing money equivalent to your property’s current market value and then paying off that loan over some time. Think of this as something similar to pawning off (Sangla) your own house.
This is something you can do if you need a huge sum of money to fund other major expenses.
Housing Loans vs. Other Loans
With all these said, what exactly makes a housing loan better than simply getting a cash loan or a personal loan?
The main advantage of availing of housing loans over other types of loans is that it often has longer payment terms, lower annual interest rates, and higher loanable amounts. In many cases, the loan amount afforded by cash or personal loans will not be sufficient to pay off the down payment for a home loan, let alone finance the entire property.
For example, low-end condo units usually sell for Php 1 million or higher. This is much higher than the usual maximum loanable amount of cash loans, which range from Php 20,000 to Php 50,000 (in some cases). In the event that you can find such a loan, the interest rate will be extremely difficult to manage.
Personal loans are usually paid off in one to two years, with a monthly rate of about 1 to 1.5 percent. Annualized, this translates to 12-18 percent. That means, for a 1-million-peso condo unit, you would be paying an additional Php 180,000 pesos per year for interest, or Php 360,000 for interest over two years! This will amount to a monthly mortgage payable of around Php 56,000, which is very challenging to pay off monthly. Compare this with the usual terms for a home loan, with payment terms of 5 years or more, and usually with rates of 6-12% annually.
For the same condo unit assuming a payment term of 5 years and an interest rate of 6.25 percent, your mortgage payable will only be Php 18,000 per month (after down payment), which is much more manageable to pay off regularly.
Collaterals and Housing Loans
One thing you should note about availing of a housing loan is that it requires collateral. Housing loans are called secured loans because the lending entity (the bank) has collateral in case the borrower cannot meet the loan obligation or can no longer afford to pay off the loan. If the borrower defaults, the bank gains ownership of the collateral, which is usually the house or property being bought with the loan. This means they now have the option of selling off the property to regain the cash that they spent to buy it. Home loans can also be called mortgage loans, and are a form of secured loan.
In contrast to this, with unsecured loans, such as cash or personal loans, the borrower does not need to provide collateral to obtain the loan. The downside is that the loan itself charges a much higher interest rate compared to a housing loan, with a much lower maximum loanable amount.
But, what exactly can you use as collateral or mortgage?
You can use the bought asset like a real-estate mortgage. This is the default case for using home loans to finance the purchase of a residential unit. This means that, while you may own the property, it can be turned over to the bank or government agency funding its purchase if, for any reason, you can’t pay your remaining balance.
However, if you’re loaning for something else, such as in the case of a home equity loan, you must use a property you already own. For example, if you already own a house, then you can use that. However, if you don’t have a property to use as a real estate mortgage, you can try using your parent’s assets as a mortgage instead. Notice that your parents must be willing to be your guarantor for this to work. This means that if you can’t pay your loan, your parent’s property will be turned over to the bank or agency instead.
The provided collateral also dictates the loan amount you can borrow – that is, the maximum loanable amount you can borrow is equal to the market value of the collateral. This is subject to the results of the appraisal of the lending entity. So especially for home equity loans, make sure that you are familiar with the market value of the property you are planning to offer as collateral, or you may end up with a much lower (or higher) loan amount than expected.
For mortgage loans, especially for condo units, the maximum loanable amount will be the selling price of the property being bought minus the down payment, provided that the lending entity accredits the real estate developer.
Where to Apply for a Housing Loan
When applying for a housing loan, there are three options you can take:
Pag-IBIG is a Philippine government agency created in 1978 to address “the need for a national savings program and an affordable shelter financing for the Filipino worker.” It is, therefore, a social housing finance corporation, which provides housing loans only for its members who pay voluntarily pay monthly contributions. This is available for people who earn a monthly salary with a company, self-employed people, or even OFWs so long as they pay their contribution.
Pag-IBIG allows its members to borrow as high as Php 6 million as a housing loan for a residential lot, brand new or pre-owned house, or a condominium unit. Of course, the amount you can loan is still subject to terms and conditions, as well as the actual amount you need and your capacity to pay monthly. Pag-IBIG offers rates slightly higher than those offered by banks but are lower than in-house financing, at around 5.5% to 10%. Loan payments can go for as long as 30 years.
The most common and most competitive housing loans are usually with banks. However, they’re usually more stringent in their requirements and may require a more rigorous application process. Banks generally offer as low as 4.99%, to as high as 8%. Some of them give fixed interest rates for 1, 2, 5, or 10 years. Loan payment terms can also be payable anywhere from 5 to 25 years. Usually, the longer the repayment period, the higher the annual interest rates charged by the bank.
If you’re buying a house, lot, or unit with a specific property developer, chances are, they’re also offering housing loans. However, in-house financing tends to charge the highest interest rates, though their requirements are also more lenient.
Applying for Home Loans in the Philippines
If you’re set on applying for a housing loan, here are a few things you need to know, regardless of which financing institution you’re getting it from:
Most financing institutions have the exact primary requirements for obtaining a housing loan. Be it in-house, Pag-IBIG, or bank loan requirements, you’ll mostly be needing the following:
- Clear copy of one or two valid ID/s (photo-bearing and government-issued) of the borrower, spouse, and co-borrower/signatories of the loan
- Filled-out and signed application form
- Income documents, such as:
- Latest Certificate of Employment and Compensation
- Latest Income Tax Return (ITR)
- Latest payslips (past 3 months)
- Latest bank statements (past 3 months)
- For self-employed applicants, Audited Financial Statements/Lease or Rental Contracts
- Copy of collateral title
- Copy of Tax declaration on land and/or improvement
- Contract to Sell or Reservation Agreement (for condo units)
- Bill of materials and estimates of construction and labor costs, for home construction/renovation
- Proof of amortization for the last 3 months and Statement of Account from Mortgagee Bank, for loan refinancing/home equity loans
- Authorization to conduct a background check
- For OFWs: special power of attorney, as well as a certificate of employment approved by the Philippine Overseas Employment Administration (POEA)
They are also quite strict with valid applicants for the loan. To qualify for a home loan application, here are a few criteria you have to meet:
- Between 21 to 65 years of age upon loan maturity
- A resident of the Philippines
Housing loans offered by different financial institutions vary in terms of loan interest rates, minimum/maximum loan amount, and loan tenor. So let’s talk about those in detail:
Maximum and minimum loan amount
How much you can borrow would largely depend on how much the property you’re eyeing is. Typically, banks can provide as high as 95% of the property’s value, though most banks offer around 80% to 90% of the assessed value.
Remember: banks won’t pay for your whole property’s value—you have to at least save up for the down payment and pay that on your own.
Now, banks also differ in terms of the minimum and maximum loan amount they give. Some banks allow borrowing of a minimum of Php 300,000 for housing loans, and there are others, like Pag-IBIG, whose minimum loan amount is Php 600,000. The maximum amount possible would depend on your property’s value and your capacity to pay it off. If banks assess that you won’t pay the loan off, they won’t grant you the high amount you’re requesting.
Regardless of your needed amount, though, Pag-IBIG only offers a loan of up to Php 6,000,000, so make sure to consider this if you plan to borrow from them. On the other hand, however, Pag-IBIG also has an Affordable Housing Loan Program, which targets applicants in the lower-income brackets. This program allows loans of up to Php 750,000 only.
Your interest rate will vary depending on where you’re getting a loan from, how long you will be paying the loan off, and the prevailing market interest rate. The usual housing loan can range from 6.5% to 12%, fixed for a certain number of years, depending on your agreement with the financing institution. After this, your yearly interest rate will vary depending on the market rate.
If you plan to pay off your loan over a short period, say, in 5 or 10 years, you are also more likely to get lower interest rates than how much you will be paying for a loan tenor of 30 years. The financing institution will discuss all of this with you before entering into a loan agreement with them.
Pag-IBIG, meanwhile, provides rates of as low as 5.5% for the first year, and up-to 10% depending on different factors. Interest rates are even lower for their Affordable Housing Loan Program, at only 3%. Another good thing about loaning from Pag-IBIG is that the law mandates not to increase their interest rate beyond 2% per annum. Hence, even if the market interest rate skyrockets, you don’t have to worry about the interest rate being too high for you to pay off.
Your reason for availing of a home loan dictates how long your maximum loan tenor is. Banks set different loan tenors for House & Lot or Townhouse purchase or construction, residential condominium unit purchase, and vacant lot purchase. Of course, this also has to do with the fact that a house and lot will cost more than a condo unit or vacant lot.
For house and lot or townhouse purchases or construction, some banks allow loaners to pay off the loan for a maximum of 25 years, though most banks only require 20 years. The tenor can be from 10 years to 25 years for condo units. For vacant lots, this ranges from 10 years to 20 years. For Pag-IBIG loans, the maximum loan tenor is for 30 years.
Banks are known for their stringent application process, which translates to the length of their approval period. For example, it may take months for a housing loan to be approved with a bank, whereas in-house financing institutions approve loans over a short period. If you’re in a rush to have your loan approved, this is something you also have to keep in mind as well.
Eligibility Criteria for Housing Loan Applications
Now that you know everything there is to know about preparing and applying for a loan; let’s talk about the different key factors that financing institutions consider in approving or rejecting applications. First, here’s how your application will be evaluated:
This plays a huge part in determining whether or not you are getting a loan. Financing institutions, after all, have to make sure that you are capable of paying off the mortgage loan, meaning you have enough income to pay for this on top of your usual monthly expenses. If they believe that you’re not earning enough to consistently and sustainably pay off the loan at the amount you ask, they may either reject your loan or advise you to lengthen the loan tenor or decrease the loan amount. For Pag-IBIG, what they look at aside from this is the amount of your contribution to the agency.
If you’re already married and looking to build a home with your spouse, your spouse’s income will also be considered. This is because by law, any loan undertaking by a married couple is a joint loan, and for housing loans, the property they will be buying shall be co-owned by them. This ensures that the household will have enough money to pay off the mortgage loan; you should be able to pay for it while also paying for other necessary expenditures for the household.
Having a family means that you have more money to spend per month—you may need to pay off tuition or spend on groceries. This is taken into consideration by the bank in determining if you will be able to pay off your loan.
Your credit history provides your evaluators an idea of how responsibly you repay your debts and loans. This is often obtained from collated data from credit cards, banks, collection agencies, and other sources. If they find that you’re responsible for repaying your dues, they will be more inclined to believe that you will pay off your loan responsibly, too!
Stability of occupation
For banks to be assured of the stability of your job, you should ideally be employed for at least a year (more preferably two years, especially for considered high-risk industries) before you apply for a housing loan. Self-employed applicants, likewise, should show proof about taxes, profits, income, and business permits for some time. This ensures financers have a stable income source to pay off their loan.
Banks will usually contact your listed employer during the credit investigation process to guarantee that you are a permanent employee of good standing. Therefore, make sure that you are doing well in your work before applying for a loan. For self-employed borrowers, banks will also investigate your business by visiting your listed business address to ensure that the business you listed is legitimate.
Financing institutions consider your age, especially when discussing the maximum term for your housing loan. Ideally, you should be able to pay off your loan before you reach 65 years old—the age of retirement in the Philippines.
The purpose for applying for the loan
Banks are more amenable to approve loans for properties that are for residential use, i.e., houses or condo units that the borrower will live in once the loan is approved. On the other hand, loans for properties that are for investment use are harder to approve because of the risk that a third-party entity (a tenant living in a condo unit you rented out, for example) will damage the property and lower its market value.
By law, only natural-born citizens can own property in the country. Thus if you are a foreigner, you will not be allowed to have a property under your name, even if you are currently residing in the country.
Applicants with criminal records, especially related to finances (e.g., estafa) will not be approved. In addition, applicants included in blacklists, such as those for known money launderers or a history of defaulting on loans, will not be approved as well.
Other Loan Options
If you’re looking for fast loan approval, or if you just need a smaller amount to loan, there are other avenues you can consider in applying for a loan.
For instance, fast-approval loans, such as a Home Credit Cash Loan, may be of interest for you.
Unlike banks that require arduous application processes, the Home Credit Cash Loan can give you their decision within a few minutes or hours from the application. It’s also meant for a smaller amount of money, with their loans amounting only up to Php 150,000. This is perfect if you only need minor renovations or refurbishments for your house.
To apply for a cash loan with Home Credit, you will only need 2 valid IDs and a complete application form! It’s meant for a seamless, convenient, fast loan approval you might need.
Note, though, that part of the price to pay for this convenience is a higher interest rate. However, with a lower loan amount, this may not be as difficult to pay off as in loans that reach millions!
Frequently asked questions
How much can you borrow on a home equity loan?
The maximum loan amount you can borrow on a home equity loan is dependent on the market value of the property you are offering as collateral.
Normally, banks will conduct an appraisal of your property to determine its market value. To do this, an appraiser will visit your property to conduct an ocular, so it is best to make sure that there are no significant or irreparable damages to your property that can lower its market value when applying for a home equity loan.
Can I get a home equity loan with a bad credit?
No. Part of the approval process in getting a home equity loan is an investigation into your creditworthiness as a borrower. Having bad credit, especially for smaller amounts such as credit card bills or personal loans, will signify that you have difficulties or negligence in meeting your debt obligations.
Even if your outstanding loans are not from the bank that you are currently borrowing from, banks usually refer to a shared banking database of known individuals with bad credit history, so even if you choose not to reveal it, the bank will still find out.
On top of that, in the unlikely event that you get approved with existing debt, your debt-to-income ratio will probably breach the 40% threshold. Since any existing debt is counted against this, your loan will most likely not be approved.
Getting a housing loan is a much more massive financial responsibility compared to smaller loans like personal or car loans. If you are having difficulty paying off these smaller loans, it may be best to hold off on applying for a home loan yet until you can manage your finances better.
Who are eligible to apply?
All Filipino citizens of legal age with a stable source of income are eligible to apply. For older applicants, the tenor of the loan may be adjusted to finish before you turn 65.
What is the difference between a loan and a mortgage?
A mortgage is a type of secured loan, using the property as collateral. The property being used as collateral is also not yet owned by the applicant, and thus is using the mortgage to finance buying the property for personal use.
However, a home mortgage is not the only type of loan you can get concerning a property. You can also apply for a home equity loan, to receive money based on the market value of a property that you already own.
Although both use the property as collateral, a home mortgage is a loan used to gain funds to buy said property, a home equity loan is used by people already owning said property to gain funds for personal use.
As you can see, applying for a housing loan is a big financial responsibility that you have to prepare for. Compared to other types of loans, housing loans offer a significantly higher amount of money, which also means you’ll have a bigger financial obligation.
With these said, it’s important to gauge your capability of entering into this commitment. Hopefully, this article was able to shed insight on what you have to know before applying for a housing loan in the Philippines.