Prequalification and Down Payment - First Time Home Owner

Every young adult dreads the day when they will be faced with the M word. The

unfortunate reality, however, is that unless you’re inheriting a paid-off property or two, or a

couple hundred thousand in cash, you’re probably going to need one in your life. I remember

learning in my first year accounting class that the word “mortgage” is derived from the French

word for death, “mort”, because you’re expected to pay it off until you die. It was a harsh lesson

which opened up a tough lecture in my hardest class. From that moment I decided that I would

never put myself in that position.


Fast forward to the summer of my second year when my interest in real estate led me to

browsing agency websites all day, and I was humbled with the quickness. “Oh... OH no.” I

scrolled from low to high, naturally, and instantly realized that in order to afford a medium-sized middle class home or apartment at a young age, you would probably need to be making $100,000 or higher annually in order to pay upfront in cash, preferably with a partner doing the same. Being about to start my final year of my undergraduate degree that same summer, I also quickly realized while browsing fresh graduate jobs both in the UK and The Bahamas, that that was very likely not going to happen.


I soon got well acquainted with the mortgage calculator tool which can be found on most

real estate websites, and while the results were still intimidating, it helped me to put a lot into

perspective. Yes, the down payment for an average home may be one of the highest amounts of

money a single person pays out at once in their lifetime, but monthly mortgage payments are not

that far off from rental costs. I figured if the monthly costs would be around the same, it made

more sense for me to start saving up for a down payment to buy somewhere instead of renting by

the time I graduated and moved back home.


So as I mentioned in a previous blog, I aimed to have $10,000 in savings by the time I

graduated and moved back home. Give or take a few weeks, since I started working full time

immediately after I came back, I made my goal. That gave me a decent starting point to begin

comfortably looking at properties and prove to the banks when I approached them that I was a

responsible saver with a building block to work towards a mortgage approval. However, I had no

clue where to start to get to that point.


Luckily, I had a coworker who bought her first apartment here at 25, so as I told her my

plans and progress, after every sentence she’d tell me, “Get prequalified. You need to go and get

prequalified before you go any further.” Having no idea what that really meant yet, I called my

primary bank with the opening line, “Hi, I’d like to be prequalified”, and I quickly was on my

way to actually starting the buying process.


This was the point where I began to understand what a prequalification really is: a

prequalification will tell you the maximum amount of money you’ll be allowed to borrow

comfortably from a bank or lending institution based on your current income and expenses, so

this will give you a realistic idea of what price range of properties to be looking at.

At the prequalification meeting, you should take any supporting documents you can (pay

slips, evidence of additional income, bank statements, etc.) to convince the bank or lender that

you are responsible enough to pay back anything that they may be willing to lend to you. Most

institutions here only lend to people who have been in a full time position for at least two years,

however, it may be possible to negotiate this or to just set up a meeting to get your foot in the

door before you reach that milestone.


Also at the meeting, you will discuss the bank or lending company’s lending policies,

such as interest rates on loans, payback periods and conditions (such as if you choose to pay it

off early, or miss payments). Not all banks or institutions have the same lending conditions, so

it’s important to speak to a few if possible to make sure that you’re getting the best deal in your

circumstances.


I estimate that the average conditions in The Bahamas for a young person on their first

loan are: around 4-7% interest rate, 30 year payback period and 10% down payment. You can

plug these figures in to mortgage calculators on local real estate websites to figure out what your

potential monthly payback to the bank would be in these conditions. Not all of these are the same

for every institution and they can change overtime, so this is why it’s important to speak to

several to figure out which works best for you and what's realistic in your situation.


Down payments these days can be around 10% of the purchase price, (although if you

pay down less than 20%, you will also have to pay a mortgage indemnity fee to the bank). So if

you have a property worth $100,000, you will need a down payment of $10,000 if it’s a 10%

down payment. The percentage required to be paid down may vary by bank or lending

institution, but ultimately the seller of the property decides how much they want you to put

down. This is why a preapproval early on is crucial to make sure that you’re not wasting your

time, as well as the seller’s, viewing properties that you wouldn’t be able to afford a mortgage

on.


If you’d like to get a head start on your buying journey, of course having enough saved

for a down payment is always a plus, but getting prequalified is really the first official step. Here

at 1OAK we have qualified mortgage specialists who are able to give you a prequalification and assist with the buying process from the very first stage to the closing sale. If you’re ready for a free

prequalification, this is your sign to get in touch with a 1OAK real estate expert and get started.

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