House Finance: Bank vs In-House Financing

Getting one's own house is every average man's dream. With rising real estate prices nowadays and shrinking space, having enough cash to pay on the spot any property is a dream in itself. But your dream house may still become a reality with a bit of help from financing institutions like your bank as well as home developers themselves through in-house financing. How do you know which is the better option for your needs? What do you need to do to start the process?

These are general tips to start you off on the right track. Requirements may differ across regions owing to diverse rules and regulations governing home financing but learning about general advantages or disadvantages of the two options available will go a long way.

Loan vs Mortgage

Many confuse the terms 'loan' and 'mortgage', but these are two different concepts. A loan is a type of debt wherein a borrower obtains money from the lender to be paid at a later date, usually with interest, and may be secured or unsecured. A mortgage on one hand, is a type of loan secured by real property and evidenced by a security instrument. You as the owner (borrower) transfers to the lender an interest in the real estate which serves as the security or collateral for the payment of debt. This instrument protects the interest of the mortgagee (lender) on the property by creating a lien over it. Despite these, you as the mortgagor still retain full ownership over the property. Under a mortgage, the lender has the right to sell the secured property through foreclosure in order to recover unpaid debt. This can only be done through a court proceeding, more specifically, judicial foreclosure.

Bank Financing for a housing loan is commonly referred to as 'mortgage' with the subject property or house itself as the collateral.

1. Lesser Interest Rates

The rates being charged by the bank is often lesser than in-house financing by developers because banks as financial institutions enjoy the benefits of economies of scale. But you must be aware that banks often offer fixed interest rate for a period of 1, 5, 10, 15, 20, or 25 years with repricing rates so don't left out this important detail when talking with the loan account officer.

2. Transfer of Property Ownership to the Buyer

Under this scheme, the title or ownership to the property is already transferred to the buyer. It is the buyer now who mortgages the property to the bank or financing institution.

1. Processing may take longer

2. Higher equity at 20- 30%

3.  Stringent documentation requirements

Banks often require complete submission of many documents. But if you do choose bank financing over in-house financing, you need to set an appointment with a bank account officer in-charge of housing loans and inquire about the necessary pre-processing documents you need to prepare. It would be advisable to shop around for the best deals you can get by getting as much information about the interest rates and terms being offered by different banks.

Common documents being asked by the banks or other financial institutions include the following:

• Duly accomplished application form (include proof of identification and photos)
• Proof of income (Income Tax Return, Certificate of Employment)
• Collateral documents (Copy of the property title, tax receipts, property vicinity map)

Then, there are fees processing fees that need to be paid for as part of the application. Make sure to submit only photocopies of the documents being asked and keep the original to yourself. To make processing faster, it helps to submit all the necessary documents complete.

In-House Financing means that the housing loan is taken from the property developer itself. The following enlists the pros of going this route:

1. Faster Processing Time

In-house financing your housing loan is deemed faster as compared to taking a loan from the bank.

2. Less Stringent Requirements

The developer will take less time in approving your application and might ask for lesser documents than the bank. Once you have paid the required reservation fee and submitted the documents, you are set.

3. Lower equity

The required downpayment is usually lesser, at most 10% of the total value of the property

CONS

1. Higher Interest Rates

The property developer will most likely charge higher interest rates than the average rate being charged by the bank. This also depends on your equity, the higher the equity, the lower the interest rates.

2. No transfer of ownership

Under an in-house financing scheme, ownership of the property will only be transferred to the buyer upon full or complete payment of the total amount.

Whatever your choice of payment for you home, it is important that you assess and weigh your capability to pay. This includes analyzing all your income, assets, liabilities and other expenses and be sure that you can truly afford the debt or mortgage payments without compromising your lifestyle in the years to come.