Taking a housing loan as a first-time borrower can be a bit tricky and if caution is not applied, might lead the borrower down a debt cycle. Learn about 5 Mistakes to Avoid when taking a housing loan as a First-Time borrower.
The housing industry in Nigeria is still in its teething stage, but key players are exploring the room for growth.
Housing loans in Nigeria
Also referred to as a mortgage, a housing loan in Nigeria is defined as a loan that is given by a financial institution for purpose of purchasing real estate.
This loan is usually for a residential property which is used as collateral to secure the loan. Housing loans usually attract a lower interest rate because the loan is secured against default on the property.
How does a housing loan work?
As stated, the property you are taking the loan to buy usually serves as the collateral. That means, defaulting in payment may lead to the seizing of the said property.
Other than that, with a housing loan, every month the borrower makes a mortgage payment, it gets split into at least four different buckets that make up principal, interest, taxes, and insurance, or PITI for short.
Here is how each bucket works:
Principal: This is the portion of your loan balance that’s paid down with each payment.
Interest: This is the interest rate charged monthly by your lender for the mortgage you chose.
Taxes: You’ll pay 1/12th of your yearly property tax bill each month based on how much is assessed each year in your neighbourhood.
Insurance: Lenders require homeowners insurance to cover your home against hazards like fire, theft, or accidents. You may have an additional, separate monthly payment for mortgage insurance based on your down payment or loan type.
In the early years of your mortgage, interest makes up a greater part of your overall payment, but as time goes on, you start paying more principal than interest until the loan is paid off.
Your lender will provide an amortization schedule, that is, a table showing the breakdown of each payment. This schedule will show you how your loan balance drops over time, as well as how much principal you’re paying versus interest.
Qualifying for a housing loan
To qualify for a housing loan in Nigeria, you’ll need to meet the minimum mortgage requirements to qualify for a mortgage. Lenders typically consider the following when reviewing your mortgage application:
- Your credit score
- Your debt-to-income ratio
- Your income
- Your down payment
- Your rainy-day reserves
Examples of accounts you can use to meet a mortgage reserve requirement include money in your current or savings accounts, investments in stocks, bonds, mutual funds, and trust accounts
Tips to get a good housing loan
Before you apply for a mortgage in Nigeria, you may want to research the market and choose the right lender. This will guide you through the process of picking a loan with features and benefits that align with your needs.
By following the tips listed below, you are n your way to getting a good housing loan.
Check your eligibility
Before launching in, make sure you meet your preferred lender’s eligibility terms. Also, check how much home loan you can apply for with the home loan eligibility calculator.
Make sure you have a good credit score
Maintain a high credit score, of 750 or above, to be able to negotiate for more flexible terms and enjoy quick approval and a favourable interest rate.
Understand the fees and charges
Read the loan agreement to know the conditions associated with the various fees and charges and assess the cost of the loan.
Save funds for a down payment
Every mortgage provider will insist on a down payment. As you are getting ready to apply for a home loan, having funds for your down payment ready will help you a lot.
Also, prior planning helps you repay your loan without hassles and prepare for a large down payment when you want a home loan.
Keep all relevant documents handy
Whether you are applying online or offline keep the required documents for home loan applications ready to have your application processed quickly.
5 Mistakes to Avoid when taking a housing loan as a First-Time borrower
As a first-time home loan borrower, you are more likely to fall into a trap than a returning borrower. While these loopholes may not be put there deliberately, it is good to have prior knowledge before venturing in.
Below are some mistakes you can avoid to ensure that your loan application and approval go without a hitch.
Poor credit score
Don’t fall into the trap of not having a healthy credit score. A credit bureau provides credit reports, which are quite easy and convenient to download.
A credit score above 700 may lead you to a favourable scheme. This will also give you the power to apply for a loan through the best banks.
A poor credit or repayment history will reduce the score and the borrower won’t be eligible for good home loan schemes.
Lack of proper research
Nothing beats research. In Nigeria, home loans are becoming quite popular and easily available. With the increasing demand, multiple financial institutions provide customised schemes meeting one’s needs.
As a borrower, it is very important to do proper research before applying for a loan from a particular institution. Home buyers need to double-check their requirements, plan their finances, check terms and conditions, identify hidden charges, processing fees, and flexible repayment options to name a few, and accordingly, select the appropriate bank and scheme.
A lack of research may lead you to pay unnecessary charges or higher monthly installments.
Opting for shorter tenures
As far as possible, it is advisable to not opt for a shorter-tenure home loan. The shorter the tenure, the smaller the loan amount. This also leads to a higher risk of default in the payment of monthly installments considering the high EMI.
The eligible amount would depend on various factors such as age, credit history, and repayment capacity. Also, you need a high credit score and good repayment history to avail of higher amounts and get favourable terms and conditions.
A longer tenure will ease your EMI and meet your financial objectives.
Overestimating repayment capacity
Perhaps the biggest mistake you can make as a borrower is to exclude your monthly expenses while calculating your repayment capacity.
The bank generally looks at your liabilities while granting a loan. If your monthly expenses are high and you take a home loan with a higher monthly installment amount, it may lead to a huge financial crisis.
Your monthly installment outflow generally should not exceed 30 to 40 percent of your income. You consider your present financial situation before opting for a bigger loan.
Not taking any insurance cover
Home loan borrowers are always advised to take proper insurance coverage to protect their families from financial distress.
In case of any unforeseen contingency, home loan insurance can help the family to clear the dues. Multiple insurance products cover home loans.
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