Essential sesame in order to conclude a real estate transaction, the alls of credit is a long and complex stage. In fact, in the vast majority of cases, becoming a homeowner requires obtaining a mortgage with a bank, with all that this involves documents to provide, guarantees to present and precautions to take. This section of our Practical guide to mortgage loans tells you everything you need to know before getting started with a mortgage application.
Credit application: how much can you borrow?
Before even trying to get a mortgage, you need to start by calculating the amount you can borrow from your bank. This amount is determined by what is called “debt capacity”, that is to say the maximum amounts that you may have to repay each month, and by the interest rate of the loan which will determine the total amount of your loan.
Financial institutions are very attentive to the question of debt capacity at the time of your request for credit. In principle, it should not exceed 33% of your income, or one third of all that you earn.
The remaining 67% is considered to be the “remainder to live”, that is to say the sums necessary, each month, to live decently. It is essential to go through this calculation to estimate your loan. To do this, use The Good Finance simulator which will help you calculate the maximum amount of your monthly payments, therefore the total amount that you are able to borrow, before applying for a mortgage.
Find the right interest rate to get an attractive mortgage
Of course, the amount you will be able to borrow depends greatly on the interest rate you can claim. The interest rate determines the final cost of your loan, based on the amount you will have to pay to the bank to consent to your mortgage application.
The interest rate is a function of two factors:
- Average rates at the time you apply for credit;
- The levers that are yours to negotiate a credit to your advantage.
The rates being very changeable and the banks more and more demanding, the best solution is to go through a mortgage broker. This will aim to find you the best solution based on your personal and professional situation.
Obtaining a mortgage: acceptance criteria for banks
Once you know how much you can borrow, you have to convince your bank to lend you the money. A step that is never an easy task. For a credit request in good and due form, your bank will oppose several economic and professional criteria. Here are the three most important things to take into account when putting together your mortgage application: personal contribution, professional situation and savings.
Personal contribution, essential for any mortgage request
The personal contribution is a sum that you own and that you inject into your mortgage. More and more banks require their customers to have a personal contribution for any request for credit: it is at the same time a security for them, and a proof of the serious financial of the household. In addition, this sum is generally used to pay the notary fees and / or agency fees.
In general, the personal contribution must correspond to at least 10% of the total amount borrowed, or $ 20,000 for a loan of $ 200,000. The higher your contribution, the more you will be able to negotiate your interest rate downward and thus obtain a mortgage under the best conditions.
The professional situation
Another essential criterion for a mortgage application: your professional situation. We know how difficult it is to get a mortgage with a CDD or any other precarious contract, or if you are a business owner or self-entrepreneur. In short, it is better to have some job security to qualify for a loan.
The advantage of a household, it is that it borrows from two: do not hesitate to assert in priority that of the two members of the couple that which has the most favorable professional situation. For this credit application criterion, the income is not in question: it is safer for a bank to lend money to a person on a permanent contract who earns a modest living, but who has better chances of keeping his job, only to an entrepreneur who earns four times more, but without a safety net.
Savings, proof of your financial seriousness
For any mortgage application, one of the major criteria of the bank is to prove your financial seriousness. To prepare your credit application, it is therefore in your best interest to:
- Have not suffered an overdraft in the past 6 months
- Have no other current credit (affected or not)
And of course, have a solid savings. Having a well-filled A booklet or having placed money in a PEL (Housing Savings Plan – which will serve as your personal contribution) or in a CEL (Housing Savings Account) allows you to demonstrate to your bank your serious financial.
In short, before any request for credit, it is better to have been an ant rather than a cicada!
Let’s add an optional criterion that will do good to your mortgage loan application file: the financial assistance you can benefit from. If you are eligible for zero rate loan (only for first-time buyers) or any other form of assisted loan (1% housing loan or other), do not hesitate to highlight it with your bank.
The different costs to take into account for your mortgage application
Finally, last point: your credit request must not only take into account your debt capacity and the monthly payments that you will have to repay. Obtaining a home loan generates a number of ancillary costs which you do not immediately think of, and which are added to the loan amount or which are payable when the loan offer is signed.
Fees to be paid immediately
Certain costs are to be paid immediately upon acceptance of your mortgage application. Among these costs: compulsory guarantees (mortgage or surety, protections taken by the bank to cover against possible unpaid) and administrative costs (representing approximately 1% of the capital borrowed, these costs are negotiable).
Don’t forget the fees of the notary! If it plays an essential role in your transaction, its fees are also part of the amount to be paid when obtaining a mortgage.
Diluted costs in mortgage
As for the essential insurance, its cost is diluted in the repayments of the mortgage: it must therefore be taken into account in the calculation of the total amount to borrow at the time of your credit request.
If it is essential, home loan insurance however, is not mandatory. But no bank will lend you a penny if you haven’t purchased insurance with certain minimum guarantees, including guarantees against the death of the borrower or his permanent disability. You are free to add additional guarantees to protect yourself against non-working periods or temporary work interruptions.
Finally, note that since the Lagarde law, it is possible to decline the insurance offer of your bank to prefer a contract taken out with a third party. This is called delegation of insurance, and this solution will generally be cheaper than accepting the group banking contract. Other laws have been added, including the Sapin 2 law which allows people who have benefited from an offer since February 2017 to be able to cancel their insurance each year.
Here are all the elements to know for your credit application. To go into detail, do not hesitate to explore the following pages of our guide!