Home loan: how to prepare your bank account?

A well-prepared bank record is the key to obtaining a home loan.

The key first step in becoming the perfect mortgage candidate is getting ready. The bank wonders if you are a good manager of your money and if they can trust you. If you submit a complete and solid application, you will double your chances of having the mortgage you want. And your request will be taken into account as soon as possible.

Our advice: submit your mortgage application before your research and not after.  Being pre-approved makes you a good candidate and sellers will look on your offer favorably.

Discover in this article all the secrets to properly prepare your bank account. And do not forget that as a real estate advisor, we are at your service for the search of financing and to build your mortgage loan file.

THE REAL ESTATE LOAN APPLICATION FIRST!

Contrary to what you think and what brokers, real estate agents and even bankers say it is better to prepare your bank file before starting the search for his property.

Why? Because it will save you from unpleasant surprises! Do you know the amount that the bank can lend you and especially if it can lend you? Today, almost everyone who needs a home loan starts researching without having answers to these two essential questions! Every day, we are contacted by people who have not obtained their bank loan or who only have a part, and they ask us to work miracles: recover the amount paid during the sales agreement, find in less than 48 hours a bank that will agree to give them more … Sometimes we can solve these problems, but more often than not it is impossible.

By mounting your home loan file before your research, you can obtain confirmation of the amount of financing available and move your project forward safely. That is, do your research knowing that you have the ability to buy for a specified amount. You are not asking for a firm loan offer from your banker but for an agreement in principle on an amount, duration and rate (and if possible conditions).

We always tend to overstate our borrowing capacity. Which ends up creating situations that are sometimes difficult, if not impossible, to get out of. Three examples experienced in 2019:

  • After a month of research, a couple found the property of their dreams, an 80-m2 apartment on the Costa Del Sol at 250,000 euros. They pay 10,000 euros to reserve this property. They will then see their American banker hoping to be able to borrow the equivalent of 200,000 euros at a rate of 3%. Banker’s response: we do not lend for real estate investment in Spain. They go to see another bank which grants loans for acquisitions in Spain: and there again, it is a refusal because our couple has no property to put up as a deposit even though they have a comfortable family income (8000 dollars per month). In desperation, they then turn to the Spanish banks that reply that they can lend them a maximum of 160,000 euros at a rate of 2.2%. Stuck because pressed for deadlines under penalty of losing their reserve of 4,000 euros and their apartment, they go into debt for the difference of 40,000 euros, to a credit organization that grants them a loan corresponding to a rate of… 4, 5%! Without of course notifying the Spanish bank, which could reverse its decision to grant its loan. In short, loss of money and a potential headache.
  • A young bachelor with a comfortable income of 8,000 euros a month found a magnificent frontline studio in Palma de Mallorca at 290,000 euros. He pays 5,000 euros in reserve. In the end, he will not find any bank that will lend him in Spain because he already has loans in progress (2 cars, various consumer loans) that represent 3,500 euros per month. He also lost his 5,000 euros of reserve because he had not put a clause to recover this reserve in case of failure to obtain a loan. Lost time and money.
  • Yet another example: a retired couple who have set a budget of 350,000 euros for a large apartment in Seville and have 50,000 euros of equity. They find it but no bank will lend them more than 200,000 euros given their income and their age! Conclusion, they start looking for a budget of 100,000 euros lower than they thought at the start. Lost time.

Take our advice: build your mortgage application and go to the bankers BEFORE your property search.

We say “bankers” because we have to put them in competition. It costs you nothing and doesn’t require more work: the loan file is the same for all banks. Compare banks for the best rate and best credit terms. A loan commits you and must be repaid, so check the credit conditions, the repayment terms, the terms of the monthly payments, the credit insurance, the possible penalties in the event of early repayment, etc.

Note: this is all valid for a mortgage in any country of course.

THE AMOUNT OF THE LOAN GRANTED DEPENDS ON THE DEBT RATE

Normally, the debt ratio (income / debts and monthly fixed charges) cannot exceed 33% of your net income, unless there is a significant amount of disposable income left.

  • Income taken into account in the debt ratio = net wages + other financial income (rental income is only taken into account at 70%, social assistance or alimony is not taken into account)
  • Debts and fixed monthly charges taken into account in the debt ratio = current loans + rent and rental charges + insurance + alimony + private tuition fees…
  • Disposable income = leftover amount after income and debts and monthly fixed charges

The debt ratio can exceed 33% of income if there is a lot of disposable income left. For example, a couple whose two spouses are on an open-ended contract with a significant living allowance may have an acceptable debt ratio for banks which can rise to 40%.

Example of calculating the amount of a loan:

Mr. and Mrs. Richard are 50 years old and have an income (as defined above) of 3300 euros. They no longer have dependent children and wish to acquire a second home in Andalusia. Their monthly debts and fixed charges are 600 euros (they have already reimbursed the loan for their main residence). They therefore have a debt rate of 18% (600/3300) and a disposable income of 2,700 euros. The 33% requirement equates to € 1,090. The banker can therefore grant them a mortgage loan over 20 years with monthly payments of € 490 (1090-600) per month at 1%. They will be able to obtain 106,000 euros in loans. With their savings of 29,000 euros, they can acquire a property worth 135,000 euros (including taxes, fees and acquisition charges) in Andalusia: their research should therefore relate to properties at a maximum price of 120,000 euros.

A REAL ESTATE LOAN OUT OF SPAIN FOR A PROPERTY IN SPAIN

Obviously, this seems natural, where you live you have your bank account there 20 years, your banker knows you well. So you might as well ask him for a mortgage.

But… but not many banks in United States grant loans for real estate investments in Spain. Why? Because they don’t make any more money from it and they take risks by doing it! This is why, when if they do, they will ask you for a guarantee, most often another property necessarily located in your country. For example a mortgage on your principal residence or on another real estate.

Tips: Most banks today have an international department that can handle certain profiles or requests – which agency advisers are not always familiar with. Ask your banker to find out how to get in touch with this department.

With this kind of loan, you can get up to 90% of the purchase price of your property in Spain, very rarely more, most often over 20 years.

You will still have at least 19 to 23% to bring in personal contribution: mortgage costs, 10% of the missing purchase price and taxes, fees and charges on your purchase in Spain (the ITP is a variable tax from 4 to 11% depending on the region).

A REAL ESTATE LOAN IN SPAIN

Regardless of nationality, Spanish banks make an important distinction between non-resident customers and residents. The amount of capital you can borrow for a home loan, the interest rate, and the term of the loan differ.

The loan is associated with a mortgage in almost all cases. When purchasing a property in Spain, the client must justify to the Spanish bank the origin of the funds brought in (account statements in their country of origin for example) to carry out the transaction. This requirement is a legal requirement to prevent money laundering.

Special feature of Spanish banks:

  • The amount of the loan is most often proportional to the lowest value between the negotiated sale price and the value of the tasacion (estimate of the value of the property), and for some banks it depends only on the value of the tasacion.
  • They offer fixed rate loans, but also variable rate loans. They were even the norm at the time of the real estate crisis 12 years ago. We advise you to favor fixed rate loans, which could avoid unpleasant surprises!

You are resident

Spanish banks offer residents financing of up to 80% of the value of the property. This percentage may be exceeded for certain banking entities, subject to larger guarantees and under certain conditions. For example, the rates of loans offered to acquire a primary residence are on average more advantageous, and the percentage of financing higher than for the purchase of a secondary residence. Or if the borrower’s debt ratio is less than 15% and the remainder of living is substantial.

Most of the loans are granted for terms of 20 to 30 years with a rate close to 2%.

Note: an employee of a multinational expatriated by his company will benefit from more advantageous conditions than a “globetrotter”, that is to say a person who left to work on his own in Spain.

You are non-resident

The borrowing conditions are less advantageous if you are non-residents: the financing does not exceed 70% of the value of the property, and the rates offered are often less attractive (from 0.2 to 0.4% more). In the event of default, the bank wants to be sure that the value of the property acquired can cover the repayment of the loan.

If the non-resident can demonstrate family ties in Spain, has a bond or is a joint holder of a bank account with a resident, the percentage of the acquisition value may be increased, or even equal to the one offered to residents.

The maximum borrowing period cannot generally exceed 20 years.

The bank may require that the non-resident have their documents translated into Spanish by a certified translator.

THE LOAN FILE

What should you do before applying for a home loan to the banker?

What documents are found in the loan file?

How to prepare the request file?

How to surprise the banker?

Before applying to the bank

You have a number of things to do before you file your mortgage loan application with the bank. It may take time but it always pays off.

FIRST, CLEAN YOUR ACCOUNTS!

Your last three account statements must be provided to the bank in your credit application. They will be used in particular to calculate your debt capacity and your disposable income, but also to determine if you are a good managerof your money. Certain behaviors (overdrafts, consumer loans) are indeed very badly perceived and could block your access to mortgage. They tell the banker that the person is having trouble managing their money and that they may therefore have difficulty repaying their loan, especially with late payments or delinquencies.

Your debt capacity should normally be limited to 33% of your net income (see the chapter on the subject above). If you have other loans in progress (a student loan, a consumer credit, etc.), be aware that they are included in the calculation of this rate. Banks hate consumer loans other than those dedicated to the purchase of a family vehicle. So clean up and if possible settle all your loans before submitting the loan file. This will increase your debt capacity.

Payment incidents must absolutely be avoided. Bank overdrafts will make you look bad, for some banks. No bank overdraft is a non-negotiable condition. Plan ahead and avoid overdrafts three months before applying for a home loan.

Tip: (1) If you have had an overdraft in the past 3 months, wait until the date when this overdraft will no longer appear before submitting your file. (2) If you have one or more loans outstanding, try to settle them and present your bank statements with the minimum amount of loans, if any.

SAVE!

To support your home loan file, you must consolidate your savings.

Above all, because it is necessary for your personal contribution in the acquisition project. Without savings or other financial resources at least equal to the contribution, there is no point in thinking of acquiring anything. And don’t forget that this contribution can vary from a minimum of 15% (in the most advantageous region for tax purposes, the Basque Country) to a maximum of … 45% of the acquisition value (in the case of a bank loan in Spain for a non-resident for an acquisition in the less tax-advantaged regions, Catalonia or the Valencia region for example)!

Building up savings well in advance of your acquisition project also significantly improves your mortgage loan application file for various reasons.

First, the bank is reassured about your ability to save. In fact, even if your income is high, but you have never had to save regularly, your disposable income will decrease drastically. This sharp drop will scare the bank. And they will legitimately wonder if you will be able to reduce your lifestyle.

In addition, if your savings are substantial, it partially secures the risk of default for the bank: your cash can be used to pay your monthly payments.

Finally, if you borrow from a bank you weren’t a customer of, that bank also hopes to sell you savings products. Home loans are a great way for banks to attract new customers over the long term.

AN OPEN CONTRACT TERM IS BETTTER THAN A FIXED TERM CONTRACT

If you are on a fixed-term contract and you know that you will be offered an open-ended contract in a few months, wait these few months before applying for a loan. A banker lends more often and more to a open ended versus fixed term worker.

Self-employed entrepreneurs, intermittent workers, self-employed workers, the liberal professions and even pensioners also regularly manage to obtain a mortgage. The main thing is to prove to the bank that you have regular income. If part of your income is variable, the bank will average over the past three years.

BE PATIENT!

Settle consumer loans, force yourself to have no overdrafts, build up significant savings, and change your status… In the end, it all takes time, sometimes 6 months, sometimes much more, but that’s the price to pay to have a loan request accepted at a satisfactory level.

Customers have successfully increased their debt capacity by 50% using these methods!

The documents of the mortgage loan application file

If there are several co-borrowers, the file must necessarily contain the documents relating to all the persons taking out the loan.

To apply for a mortgage, you will have to justify your identity, your resources and your current expenses (rent, current loan).

PERSONAL DOCUMENTS

Below is the list of personal supporting documents, forming the first mortgage condition to be included in the file:

  • NIE (Foreigners Identification Number), an obligation for all foreigners wishing to buy in Spain. Please note, it can take up to 2 months to obtain it.  Of course you need to have a valid visa to get a NIE!
  • Identity document (identity card or passport).
  • Proof of family situation (family or marriage book, PACS certificate, etc.) if you borrow as a couple.
  • Matrimonial property regime and possibly marriage contract
  • Proof of address dating from less than 3 months (receipt of rent, electricity, water or telephone bills, certificate of accommodation, empadronamiento in Spain, etc.).

DOCUMENTS RELATED TO YOUR RESOURCES AND EXPENSES

Second condition to obtain a mortgage, the documents justifying your resources and any charges that fall on you:

  • Work contract and last 3 pay slips if you are an employee
  • Last 3 proof of retirement or pension payment if you are retired or pensioned.
  • Last 3 accounting balance sheets (3 years) if you are self-employed (self-employed entrepreneurs, liberal professions, traders, artisans or farmers).
  • Statements of your bank accounts for the last 3 (or 6 depending on the bank) months.
  • 2 or 3 years of tax statements.
  • Evidence of any outstanding credit owed.
  • Any document attesting to any property income.
  • Deeds of ownership of property in own name and amortization table for outstanding loans.

OTHER INFORMATION AND DOCUMENTS

If you have real estate, present it. The bank will value it less, as it is hard to liquidate but it can enhance your loan application file. In the event that you make a loan outside of Spain, it will be essential in your country to establish the mortgage with enough credit necessary for the acquisition.

Do not hesitate to add to the mortgage loan file all other documents that could highlight your financial sincerity. In particular savings, investments, life insurance. Everything is good to convince the bank that your finances are strong enough for your loan.

Do not try to hide anything from your banker, he will find out and it will have a very negative impact on your credit application. Admit your weaknesses to your banker but highlight your strengths. The goal is to prove to the bank that you do not present a risk of default.

INFORMATION ON YOUR PROJECT

Present your real estate acquisition project in Spain in a few lines:

  • What are you looking for? Apartment or villa (surface, rooms, proximity services, view, etc.), new or old
  • Or? Region, town, coast, countryside, downtown, outskirts
  • For what purpose? Main residence, secondary residence, rental investment (long-term rental, temporary rental, tourist rental)
  • Market research? Price and market development, rental profitability, local taxation, etc.

The more you show that you know what you want and that you know the market, the better the impression left by your file: it is this little extra that can tip the file on the right side if the banker hesitates. .

PREPARE A FINANCING PLAN

The icing on the cake: to convince them definitively, make a financing plan. It is a question of realizing a simplified provisional budget, which takes your income and your monthly expenses estimated for the years to come by adding the monthly payment of the mortgage.

Making a financing plan for your home loan will also allow you to judge whether you will be able to assume the repayment of your loan over the coming years.

Show this estimated budget to your banker. He can only be sensitive to it. This will increase your chances of getting your home loan.

GO TO SEE THE BANKER(S)

Make an appointment with the bankers. Go see several to put them in competition and have a fallback in case one of them withdraws their file.

You will see, most often, they will be pleasantly surprised by your approach. Some may tell you to come back when you have found your property. Tell them that you are only there for a quick study of your project, to have an agreement in principle and to know the maximum amount and the conditions of the mortgage that the bank could grant you. A banker who knows his job should be able to give you a first appraisal in less than 15 minutes.

You will have to show the original documents at the consultation. You will leave a file containing copies of these elements (on USB key, it will be simpler than the papers), as soon as the banker has been able to check the original documents.

Compare bank offers to get the best rate and best credit terms. A loan commits you and must be repaid, so check the credit conditions, the repayment terms, the terms of the monthly payments, the credit insurance, the possible penalties in the event of early repayment, etc.

You have an agreement in principle from one or more banks. You are then ready to go and find your property in Spain or contact a real estate advisor who can do it for you and will assist you in your acquisition until the final sales contract. He can also help you build your bank account.

YOU HAVE FOUND YOUR PROPERTY, REQUEST A CLOSED OFFER

Please note that the banker’s agreement in principle is not a contractual document.

After your research or that of your real estate advisor, you have found a property that corresponds to your budget and the amount that the bank agreed to lend you during your negotiation. You have signed a reservation contract or a sales agreement (after having checked the property, of course). You can then return to your bank to have its firm and final loan offer (which should correspond to what it had told you).

You will need to update your initial file, in particular the personal, income and expense documents on the date of the appointment. And return there with all the original documents and the updated copies on the USB key.

You will also need to attach documents relating to your real estate project:

  • Simple note of the property retained
  • Reservation contract or sales agreement or promise to sell (signed)

Everything should be fine!

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SOME EXAMPLES OF DIFFICULTIES, BUT THAT PASS WITH TIME AND A GOOD FILE

To not be discouraged, here are some examples of difficult cases. But who managed to find funding with a little time and a well-prepared dossier.

You are young and you have no savings. Explain to your banker that you are at the start of your career. And that you are already starting to build your savings for a future real estate investment in Spain. If you have a stable contract such as a permanent contract, highlight this strong point. If you tell him that it is intended for a rental investment, he will also be more aware (your property providing you with income that can pay all or part of the credit). Six months or a year later, you meet him again. He then notes that you have built up your savings and that you have carefully studied your project. He will no doubt accept a credit over 30 years.

You don’t have a permanent contract. If you have regular income fixed term contract, allowances, other income), explain it to your banker. And increase the regularity of these revenues over the long term. Also start saving. If you have or are starting to have extra income, let your banker know and take a chance.

You already live in Spain and have a small income. Despite your low income, you have sound management of your finances and you even managed to save. Put this strong point forward when building your file. He will demonstrate rigor in managing your income. By taking a loan, you will pay your monthly payment instead of your rent. This will therefore have a small impact on the management of your budget. You will therefore be able to repay your loan. The Spanish banker will understand this.

The partial or complete reproduction of this document is authorized with mention of the source below

© buyinghomespain.comJanuary 2020 – Home loan: how to prepare your bank account?

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With more than 20 years of experience in real estate acquisition procedures in Spain, we are at your disposal to assist you with all the necessary steps from the search for a property to services offered after the acquisition. When you are buying a home in Spain we help with organizing the visits of properties, the legal verification of the properties, the obtaining of a mortgage, the administrative procedures and the signature of the different notarized documents.
Do not hesitate to contact us!
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