The common misconception that first time home buyers have is that buying real estate is expensive. And they have a point. The sums of properties go well into millions. And so in order to make a real estate purchase, you must have a lot of cash, right? Well, it depends. There is a way that you can buy real estate without having to shell out a sizeable initial amount. The keyword here is financing.
When it comes to real estate investing there are different financing schemes that you can choose from. Before I tell you how exactly you can buy a house without paying a huge downpayment, let me share to you the other types of financing so you can really compare and put things in perspective. I’ve listed down the 4 different types of financing and you can check out which one fits you best.
The pros of a cash transaction are that you can close a deal more swiftly since the buyer already has the money ready plus have more negotiating power. Sellers are usually more inclined to give a discount to cash buyers since they get to be paid faster. In addition, since you won’t be getting a loan, you can save on the interest.
The con is that you’ll have to prepare the amount needed up front.
2. Deferred cash.
This payment scheme is usually available if you buy property directly from a developer. It’s similar to cash except that the total amount is payable over a span of 12-24 months at 0% interest. The advantage here is that you don’t need to pay interest. But the disadvantage is that you’ll be paying a hefty sum each month because of the short term. This is ideal if you have a huge monthly income that can cover the needed amount per month.
3. In-house financing.
This is usually offered by developers to clients who either have lacking bank/HDMF requirements or don’t have the time to process their loan application at the bank or HDMF (Housing Development Mutual Fund or Pag-ibig). The requirements are basically similar to bank financing but the interest rates are higher compared to the bank/HDMF. They go as high as 15-19%. Usual bank interest rates today range from 6.88-10%, depending on the loan term. I don’t recommend In-house financing to my clients due to the high interest rate.
4. Bank/HDMF Financing.
Now this is where you get to buy a house with very little amount down. If you invest in a property via a developer in a project that is still pre-selling, the amount that you’ll need to pay first is only the equity or the downpayment. This is around 20% of the total purchase price. The equity is usually payable over a period of 12-24 months. Some developers even allow 36 months to pay off the equity.
For example, you buy a house that is worth 2M. This would be the computation:
Total contract price: 2M
Downpayment (20%): 400,000 or 16,666/month for 24 months at 0% interest
Bank (80%) : 12,289/month for 20 years (6.88% interest)
*1.6M loanable amount
The time it takes to build a house for projects that are pre-selling is around 4-6 months. Some developers even take 9 months to a year. So during this time, you’ll only be paying for the equity. Some developers don’t allow double amortization. This means that they will allow you to pay off the downpayment first before you start to pay the bank. So it’s actually better for the buyer since the monthly payable would be a manageable amount.
With financing, you won’t need to pay a hefty downpayment (unless you want to) because you have the option to spread the downpayment over 12-24 months. And for the balance, you can spread it over 15- 20 years. The maximum bank term for a house and lot is 20 years, while for lot only is 15 years. HDMF offers a 30 year term but they have more requirements compared banks.
Investing in a property is a very simple and yet technical process. There are a lot of things you need to consider and financing is only one of them.If you want a more in depth explanation of the different types of financing, feel free to contact me for a property consultation.
Who is a person you know buying their first home – could be a renter or a son/daughter of a friend? Please send me an email with their name and situation. I promise they’ll get the excellent service they deserve.
May you live a Truly Wealthy life.
Real Estate Broker
Phone: 0917 851 2752
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