Residential Loans Impossible for the Middle-Class Man?
Owning property is unquestionably the best investment a person can make. Many people who have made efforts to buy or build their own houses are always pleased with such achievements and Ghanaians are no exception. A residential loan or home mortgage is one of the most common forms of debt. A loan is given by a bank, mortgage company or other financial institution for the purchase of a primary or investment residence. The owner of the property transfers the title to the lender on the condition that the title will be transferred back to the owner once the payment has been made and other terms of the mortgage have been met. This allows a much broader group of citizens the chance to own real estate mostly because they come with lower interest rates than almost any other kind of debt an individual consumer can find; as the entire sum of the house doesn't have to be provided upfront. But because the lender actually holds the title for as long as the mortgage is in effect, they have the right to foreclose the home (sell it on the open market) if the borrower can't make the payments. In Ghana, some groups provide deals like developer construction; where one buys residential property from their preferred developers even though said property is still under construction. The bank pays in stages to enable the developer to complete the borrower's dream house, home purchase; for the outright purchase of turnkey properties for primary accommodation, home improvements; enables the customer to expand, remodel or renovate their existing property.
In Ghana, home mortgages range from 10 to 30 years and the two main types of home mortgage loans are fixed-rate and adjustable rates. In a fixed-rate mortgage, the interest rate and the periodic payment are generally the same each period. In an adjustable-rate home mortgage, the interest rate and periodic payment vary. Interest rates on adjustable-rate home mortgages are generally lower than fixed-rate home mortgages because the borrower bears the risk of an increase in interest rates.
To access a residential home loan in Ghana, the loans are underwritten based on the creditworthiness and income history of the individual purchasing the property. To obtain a mortgage, the person seeking the loan must submit an application and information about their financial history to the lender, which is done to show the lender that the borrower is capable of repaying the loan. The main requirements are that if the property is a residential one, one should have valid evidence of ownership and should be able to pay off the entire loan amount before their 60th birthday. For one to be eligible, the person has to correctly answer questions like:
- Is one creditworthy with no history of bad debts?
- Can they provide adequate security for the loan?
- Is one financially capable of servicing their mortgage (ideally repayments should be 40% of the borrower's earnings)?
- Does one have adequate funds for the down payment and closing costs?
Aside passing the questions asked, one will need to provide various items to gain residential real estate loan approval and these include the following
- Proof of Identification - Passport or Driver's License
- Proof of Income - Employer's certification of income, with contact information to allow verification by the lender (Most recent three months' paycheck stub/salary certificate showing all withdrawals and deductions will suffice). Self-employed foreign residents may submit tax return forms for 3 financial periods while informal sector borrowers may submit audited accounts to demonstrate their income.
- Proof of Employment - Employer reference confirming that the borrower is currently in employment. Certified statement of income for self-employed persons
- Proof of Address - recent utility bills, property rates, rental agreement
- Credit History Report
- Copy of Title Documents and Deed of Mortgage (for the new home to be mortgaged)
- A Valuation Report/Appraisal (professional valuation of prospective home) can usually be deferred until an 'Approval in Principle' has been granted to you by the lender
- Statement on the existing mortgage loan (if any)
- Statement of existing life insurance policies (if any)
- Processing Fee (varies by lender)
- Facility Fee - Usually 1% of the amount to be borrowed but may vary by lender;
- The equivalent of three estimated monthly mortgage payments
- Foreign residents are advised to execute a Power of Attorney authorizing an individual resident in Ghana to act on their behalf. Please note the 'Attorney' must be an individual over the age of 18 years and does not have to be a lawyer.
Understanding the background questionings
Age: Prospective applicants must be at least 18 years and no more than 65. The maturity of the mortgage should not extend beyond the applicant's retirement age. Please note that prospective applicants above 55 should ensure that they can arrange 15-year life insurance coverage before applying for a mortgage.
Income Qualification: Applicants must provide proof of their gross monthly income by way of an employment contract, tax returns, and most recent pay-slips. Variable income such as overtime, allowances, and bonuses are not usually considered as part of gross income. Applicants who are self-employed will need to provide an income statement prepared by a qualified accountant. This should be supported by historical information on bank accounts to prove the income declared.
Income Security: Applicants must be able to provide evidence of employment for a period of at least three years. Applicants who are not in formal employment should provide satisfactory evidence of their ability to sustain the declared level of income.
Capacity to Service the Loan: Applicants should be able to provide complete and accurate information regarding their financial responsibilities and commitments. The applicant's monthly repayment obligation under the mortgage agreement must generally not exceed 40% of their gross income. Where the applicant has other existing loans, the combination of mortgage installment plus other loans should not exceed 60% of the gross income.
Deposit: Prospective home buyers are required to contribute a minimum of between 25-40% of the property value. The borrower will be required to provide evidence of this amount at the time of the residential loan application and deposit it in a designated account before the mortgage facility is disbursed; For First Time Buyer's Loan or Buy-to-Let mortgage - a deposit of at least 20% of the value of the property is usually required.
Credit Worthiness: Credit reference checks will be carried out on all credit facilities the applicant may have contracted. The lender must be satisfied that the applicant has a good credit rating before the mortgage is granted.
Value of Security/Appraisal: A valuation report (also called an appraisal) prepared by a surveyor acceptable to the lender and dated no earlier than three months prior to the application should be submitted. Once a decision has been made to purchase the property, the purchaser should contract the services of a lender approved surveyor to prepare a Valuation Report of the property on his/her behalf. The lender may allow the borrower to undertake the valuation after initial credit approval has been obtained.
Duration of the Mortgage: The typical maximum duration of a mortgage loan in Ghana is 15 years. Many lenders allow borrowers to pre-pay their mortgages if they choose.
The instrument of Security: Most mortgage facilities must be secured by a legal first deed of trust or lien on the land and building as well as life insurance and comprehensive insurance assigned to the mortgagee.
Life Insurance: Most lenders require life insurance coverage on the duration of the mortgagors covering the loan amount. This insurance serves as additional security for the lender but it is also recommended as it provides additional security for mortgagors in the event of death. That is, if the mortgagor should die during the term of the loan, the proceeds of the life policy would be used to repay the mortgage, therefore, the family would not be left with the outstanding debt from the home.
Comprehensive Property Insurance Coverage: The borrower is usually required to maintain comprehensive, all-risk insurance coverage (including fire), for the replacement value of the mortgaged property. Both life insurance (if required) and comprehensive insurance must usually be assigned to the lender during the term of the mortgage.
Residential real estate loans seem almost impossible for people who fall in the middle-class group in Africa especially Ghana. One has to go through these long excruciating processes which mostly discourages them along the line or not making the applicant meet the criteria to acquire the loan.
Several reasons make residential real estate loans become difficult to access. Some of these reasons are
Lenders are trying to protect themselves from potential loss: Some borrowers sign a contract stating they would pay their loans on time if they were lent the money. But they are unable to repay mostly because those who fall in this group mostly save so little but borrow so much. While other borrowers who default on their payment turn around and blame the bank for not being able to deliver.
In Ghana, most middle-class borrowers can’t make at least a 20% down payment as a result of the economic situation; one job loss or economic downturn and they are finished.
Lending rates in Ghana are extremely high at the moment, even when doing business with the best banking institutions. Current rates range, on average, from about 13.5% - 30% depending on your credit history.
These stringent requirements and terms attached to accessing a residential real estate facility and other financial constraints of those who fall in the middle-class bracket have been the reasons why residential real estate loan seems impossible to acq