The determination of the credit line for mortgage lending



Most real estate buyers need a mortgage for the purchase of a property. It does not matter whether the object itself is used or whether it is for third-party rental. However, before the buyers decide on a property, it makes sense to check the financial feasibility before the bank conversation. As a first step, our revenue and expense calculator will help you to get an overview of the monthly amount available for the rate.

Calculate purchasing costs

Calculate purchasing costs

Let’s say you have 70,000 USD in equity. First of all, most banks assume that the mortgage lending rate, the maximum loan, is equal to 80% of the mortgage lending value of the property.

The 70,000 correspond to 20 percent of the financing amount, the remaining 80 percent you take on as a real estate loan. This results in a potential financing volume of 350,000 USD. But this consideration falls far too short and ends in a calculation error.

It is important now, how high the incidental costs are. The land transfer tax amounts depending on the federal state between 3.5 per cent and 6.5 per cent of the purchase price. If a broker is involved in the game, you also have to expect up to 7.14 percent brokerage commission, also depending on the state. For the court and the notary another 1.5 percent of the purchase price.

These acquisition-related costs can be calculated as a rule of thumb with about 15 percent of the purchase price. They should preferably be paid out of equity. This significantly reduces your potential home loan.

Determination of the affordable purchase price

Determination of the affordable purchase price

Suppose the property should cost 250,000 USD. This will incur additional purchase costs of around $ 37,500. These you pay with your equity. Thus, there are still 32,500 USD available to represent the 20 percent equity contribution to the financing.

This remaining equity is to be fully included in the financing. Therefore, a financing would now have to be found that allows a borrowing of 217,500 USD.

The problem appears at this point: The dream house is too expensive for the desired financing. The two alternatives in this situation are: either looking for a new property or negotiating a higher funding rate and thus a higher interest rate.

The available 32,500 USD equal 13 percent of the purchase price. The bank advisor would therefore have to agree to an 87 percent financing. If the bank agrees to this higher mortgage lending scale, the 1,000 USD per month would be enough to cover a loan of 217,500 USD.

Determination of the portable rate

Determination of the portable rate

Let us assume that this is your dream home and the bank supports the higher mortgage lending rate. With an interest rate of two percent pa and an initial repayment of two percent, the annual annuity is $ 8,700. In the month this would be 725 USD. The starting position is perfect, the rate feasible.

The available capital of 250 USD per month you could also put into the mortgage lending. You can theoretically adjust the repayment amount and go to your limit of 1,000 USD. In this way you shorten the repayment term significantly.

The crux with the follow-up financing

Banks are inherently skeptical. Against this background, the bankers assume that the interest rates will have risen at the expiry of the fixed interest rate, for example in 15 years. At this time, the bank assumes an interest rate of five percent annually.

We follow our example and assume that you spent 900 USD per month on the loan and put the remaining 100 USD aside as a security cushion.

The remaining debt after 15 years is 104,779.23 USD. With an interest rate of five percent per year and a further repayment of two percent per year, the cost after the renewal per year now amounts to $ 7,334.53.

This translates into a monthly burden of just over 600 USD. So they are still within the 1,000 USD. The funding is actually nothing in the way.

Net income as a rule of thumb

Net income as a rule of thumb

Shorter is the calculation of the monthly wearable annuity with rule of thumb. One of these variants is based on the monthly net income. This also includes child support, rental income and capital gains.

Suppose this income is 2,500 USD. The banks multiply this income by a factor of 110. On this basis, financing of $ 275,000 would be possible. Prerequisites for this basis of calculation are a faultless Credit bureau of the applicant and that the income is proven to flow regularly and in the long term.

Another rule of thumb for self-employed and freelancers is based on net annual income. This takes into account the last two or three years. Either the financial institution draws the mean or it uses the weakest financial year from this period as the basis for calculation.

Self-employed are not welcomed by all institutions with kiss hand as a borrower. Often, they are only granted five to seven times the net annual income as a mortgage. It is easier for those who do not have to balance. Assuming that the annual net income of a self-employed is 36,000 USD, this could finance 180,000 USD in the worst case.

A note to the end

When determining household net disposable income, banks sometimes make things easy. They estimate for married couples as flat-rate living costs 1,200 USD to 1,400 USD per month. For each child, these expenses increase by 300 USD a month.

Determine your living expenses with the help of our household calculator. This provides you with precise data that simplifies the conversation with the lender under certain circumstances.

Third party rental – the other approach

Third party rental - the other approach

Of course, the monthly liquidity of the borrower also plays a role in a third party leasing. The priorities are set a little differently. Here, the focus is not on the revenue and expenditure account for the net income for the determination of the credit line, but the comparison of interest expense and rental income.

Equity is often considered sufficient if it covers ancillary acquisition costs. The net income must be able to close the gap between the two. However, it is dangerous to include the tax aspect, the tax relief from the deductible difference between rent and interest, also in the liquidity calculation.

On the one hand, the tax refund takes place downstream after filing the tax return. On the other hand, it should be used for special repayments or reserves.

Discounts are made, however, if it is real estate from a developer. The mortgage lending value and the market value rarely correspond to the acquisition costs. These usually also include so-called “soft costs”, such as internal commissions and expenses for marketing and prospecting.

While no increase in income is taken into account for self-employment, most banks assume that the increase in rent during the fixed-term period in terms of follow-up loans.

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