Buying a home is, for most people, the most expensive single purchase they make in their lives, and yet the concept of borrowing money from a bank to help the process is relatively new in Lebanon. However, a growing number of banks are entering this field. For home-seekers, that’s the good news. Understandable, but not quite such good news, is that the process for obtaining a home loan is much more complex than that for other kinds of personal borrowing, with various fees and safeguards unique to this type of loan.
The largest element within this single biggest purchase is the down payment. Since the down payment is made to the developer or owner of the property for sale, it is the rest of the purchase price — the balance — that the banks finance. The percentage of the price of the house represented in the balance varies from bank to bank. Some will finance lip to 80 percent while in other cases may be only 60 percent. In all cases, the amount loaned will be based on a professional valuation of the property, which may differ from the price being asked. If the professional appraisal values an apartment at $130,000 and the owner is seeking $150,000, then the money a bank will be willing to lend is based on the lower figure. Even when there is agreement on the valuation there may be a discrepancy on the figures. For example, if the deposit required by a developer is 30 percent and the maximum that a bank will lend is 60 percent, then the difference must be found elsewhere before a purchase can be made.
With such a long-term commitment — repayments may be spread over as long as 15 years — it is in the bank’s interest as much as the home-buyer’s to agree on a package that the purchaser can afford. The amount as the home-buyer’s to agree on a package that the purchaser can afford. The amount that can be borrowed is therefore usually fixed in such a way that the repayments will not constitute more than one-third of the borrower’s salary. Banks are interested in the money business, not real estate, and although there are provisions for them to repossess homes in case of payment default, this is usually done only when there is no possibility of rescheduling the debt. Not all banks charge all of the fees listed below, although what is saved in one area may be lost in another because of higher fees there.
Interest is the fee that all applicants are aware of and it constitutes by far the largest slice of the cost of a home loan. Some banks adopt a fixed interest rate for the whole period of the loan, which means that it remains unchanged and is independent of any local or international factors which may push prevalent rates up or down On such a long-term venture, fixed-rate mortgages contain — for each side — an element of delving into the unknown. However, other banks adopt a variable interest rate that fluctuates according to world interest rates (such as LIBOR — London InterBank Offered Rate —or US Prime, both of which are variable), and adding a fixed percentage. Thus LIBOR plus two percent means whatever rate LIBOR happens to be at the time the loan is taken out, varying on a regular basis, usually annually, if LIBOR itself changes. With the dramatic fall in interest rates in the US, even though banks may initially quote a rate incorporating LIBOR plus a fixed number, usually five or six, they will probably also state a minimum rate. Some banks review their variable interest rate twice, not once, a year. Complicating the matter further is the practice by some banks of combining the two rates of interest. They may adopt a fixed interest rate for a certain number of years at the beginning of the loan and then shift to a variable one, based on the prevalent world interest rates plus a fixed percentage. This is done to promote the housing scheme by making the interest rates at the beginning of a loan perhaps slightly lower when buyers’ expenses are high and their salaries fixed. As the years pass — in theory — buyers’ expenses decrease while salary rises, thus maintaining or even reducing the burden of keeping up with house loan repayments.
Some banks impose a fixed file fee that falls in the range of $100-$200, while others charge a percentage of 0.1 to one percent of the amount of the loan, with a minimum that varies between $50 and $600, depending on the size of the loan Banks usually ask for the payment of the file fees at the beginning of the process, before the loan is granted.
Banks charge commission on housing loans varying between 0.1 percent to 15 percent per quarter, applied either on the loan or on the outstanding portion of the loan. Borrowers pay this charge either inside the payment schedule, or from the start, outside the payment schedule.
When payments are made through fixed schedules, the government charges no stamp fees. When repayment occurs through notes 1.5/1000 of the amount of each note is charged. The cost of the stamps on a $1,000 note, for example, is $1.50.
The applicant pays fees to the expert that values the home so that the bank has an independent assessment of what the house is worth, and consequently, that its loan is a good investment. Although this is yet another fee for home-buyers at an already expensive rime, it has the advantage for buyers of confirming that the price they are planning to pay is a fair one. These flat fees fall in the $100 to $175 range, and vary according to the location of the house This charge is paid at the beginning, before the loan is finalized.
Both life and house insurance are required Banks adopt one of two ways of defining the insurable value needed for the house, but either way, the figure will be higher than that of the loan. The insurance coverage should either equal the total value of the house, or it should exceed the level of the loan by a factor determined by bank policy. This rate sometimes reaches a level of 130 percent. All banks insist on covering the house against fire risks, but some also require cover against natural disasters and/or earthquakes.
lenders. All banks ask for a policy that covers the risk of death or total permanent disability, with a few also insisting that war risks be written into the policy. Borrowers are expected to pay for both types of insurance. Even when the level of house insurance is based on the amount of the loan, the cover does not decrease as the loan is paid off. The possibility of total destruction of a property necessitates full cover all the time, a measure that, in any case, is a sensible move for the buyer, who has an increasing financial stake in the property. The three payment methods for these two types of insurance are:
· In full, at the beginning, before the loan is made
· Every year, outside the payment schedule
· Inside the payment schedule
Mortgage fees are charges made by the government for registering the mortgage, noting that the borrower is giving the bank legal rights over the house and preventing its sale until the mortgage is paid off. In simple terms, it eases the bank’s job in repossessing the house if the borrower defaults on payment. Housing loans of less than $120,000 with a repayment period of more than seven years are exempt from mortgage fees. Otherwise, applicants pay these fees, calculated between 100 percent and 130 percent of the amount of the loan or 100 percent of the house value, and paid at the beginning of the loan process. They are calculated at two percent of the mortgaged amount, including the charge for fiscal stamps For example, the total for a $150,000 loan mortgaged at 120 percent would be $3,600.
Penalties are incurred in case of late payment of the monthly installments. In addition, banks effectively impose penalties if part repayment or full repayment of the loan is made early. Late payment penalties range between one percent and five percent per month on the amount of the installment, charged on a daily basis Some banks also set a minimum late payment fee. At the other end of the scale, paying lump sums off the loan in addition to the installments may not save as much money in interest as some borrowers think. In the case of repayment of ‘a few’ notes, some banks do not return any of the pre-calculated interest. The definition of what constitutes ‘a few’ notes is a matter for negotiation between borrower and lender. Even if the whole outstanding balance is repaid early, banks deduct from the settlement figure amounts equivalent to only one percent to four percent interest, although the figure being charged is, of course, much higher than that.
The requirements to become eligible for a housing loan fall into two categories — personal and house. With regard to personal requirements, the most basic one is to have a steady job and a salary that justifies the level of the loan. Banks are not interested in lending to people whose ambitions outstrip their pockets and they are reluctant to run the risk of being saddled with property they may not be able to sell within the two-year timeframe set by the Central Bank. On the practical side, applicants need to provide a copy of their ID, in addition to a detailed statement of salary, with date of commencing work, type of work, basic salary, net salary, and a declaration of all continuing obligations such as other loan installments, or alimony payments. Details of salary and job status need to be confirmed in a letter signed by the employer on company stationery. A bank will also want to know how many dependent children there are in the family, and whether the spouse is also working Some banks will take into consideration a proportion of the spouse’s —usually wife’s — earnings to determine whether the household income is high enough to justify the loan. The lenders will also almost certainly seek domiciliation of salary, where that is possible, or at least for the borrower to have an account at the lending bank and to pay in the salaries on which the loan was based Some lenders may seek a guarantor even if the salary level is enough for the loan requested.
In addition to the independent valuation of the property, banks will also require the owner of the house to commit the property deed to their custody They will also want to see a copy of the purchase contract or a ‘promise to sell’. Banks do not hand over the proceeds of a housing loan to the borrower, but rather arrange for it to be paid directly to the seller, be that a developer or a private owner, on legal completion of the deal. This is not so much a lack of trust, as it is the principle that the money — as cash — was never meant for the borrower in the first place However,it does also, of course, remove the possibility of misappropriation Loans
for renovation are treated differently.In those cases, the money is made available to the borrower in a separate account, but banks generally require proof that the money is being spent for its proper purpose.
How to get one and what they cost
