Buying a new house is, for most people, a difficult decision. In some cases, for those who are lucky enough to discover and get the home of their dreams, it may be the only time they will ever do it. However, many questions arise and there is a lot to be aware of. Learning before taking out the loan can prevent a lot of problems and bad decisions. Here we will try to help you understand what is essential and common to most cases. There are, however, specificities inherent to each case and all must be analyzed on a case-by-case basis.

Types of Loans

Housing Loan - General Regime

This is the most common option. It is usually defined by financing Permanent Owned Housing and/or Secondary Housing. The latter can include options with other purposes than housing, such as rental properties or some types of tourism.

Construction Loan

This credit, as the name indicates, is essentially for the construction of real estate. The credit for construction, besides common characteristics with other Housing Credits, has some specific features.

In this case, banks do not finance the totality of the investment. As in the case of acquisition, the financing will be of a percentage of the appraisal that, depending on the bank, can reach up to 90%.

The client must present the architectural and specialties project, blueprints, and construction budget. However, banks will only proceed with the deed after issuing of the Building Permit.

After the deed is signed, the banks usually liberate 10% of the capital to start construction. This is a way for banks to protect themselves in case the funds are not being used for its intended purpose. The remaining liberations occur after an Inspection to the site (which will be charged) and if the work execution percentage is coincident with the liberated capital. For example, if the bank has already liberated 20% of the capital, for a new liberation the percentage of work executed must be at least 20%. The last 5% will depend on presenting the utilization permit (Alvará de Utilização - Building Permit).

During this phase, called the utilization phase, the client only pays interest, and does not amortize capital. The monthly installments will only include the capital after the delivery of the Using Permit.

Land Acquisition

Another option is to obtain a loan to purchase a parcel of land. Usually, the percentage of financing over appraisal is lower than in the above mentioned options. In this case, it is usually around 60%. This type of financing can be combined with construction, with a Loan for Land Acquisition + Construction.

Construction Loan

Banks also offer the option of financing renovation or reconstruction work. These can be repair, rehabilitation or reconstruction works. In their fundamentals they are very similar to Construction Loans, but if the work does not interfere with the structure of the building, no aditional permits are required.

Payment Options

The most common method for calculating installments is the French method. In practice, the installments remain unchanged (in the case of loans with a spread, variations in the indexer affect the installments).

Deferred Capital

This option allows customers to allocate a part of their loan capital (usually less than 30%) to the last instalment. In the case of a 40-year loan of $100,000 with a 10% deferment, the last installment would be $10,000 plus interest. The advantage of this option is that it makes the monthly installments lower during the lifetime of the loan, but postpones the repayment of part of the capital to the very end.

Grace of Capital

Here the client requests to pay, in the initial phase of the loan, only interest and no capital. It is an option used, for example, in construction loans.

Interest Rate

Variable Interest Rate

In the variable rate option, usually cheaper in the short term, the interest rate is obtained by adding an index interest to the spread. The Index is usually the Euribor 3, 6 or 12 months.

In this option the installment is reviewed in the same period of the Euribor (3, 6, or 12M) and it rises or falls according to the refered indexes. Please be aware that if this index goes up too much (in 2007 it reached 5,50%) the instalment may reach unbearable values.

Fixed Interest Rate

If you don't want to be concerned about fluctuations in your mortgage instalment payments, you should go for a fixed rate. Here, regardless of the economic conjuncture and the Euribor's, your instalment will not vary. Banks don't always give you the chance to keep this rate until the end of the loan. It is usually temporary.

Appraisal / Inspection

Banks always require an external, independent evaluator to perform an appraisal of the house. It is based on this evaluation that they set the maximum amount of capital they are willing to lend.

Usually it is 80%, but there are certain cases where they accept 90%.

The inspection, very common in construction loans, is like a subsequent evaluation, in which they try to determine the impact of the benefits regarding the initial evaluation.

Terms / Length of Term

All banks are free to set a maximum term, however they always benchmark the remaining years of the oldest claimant's life expectancy.

Guarantees

The mortgage is an indispensable guarantee. It can be established on the property that is the subject of the financing and/or other real estates. This or these properties are registered in the name of the owners for the duration of the loan. However, the bank is entitled to take over ownership of the property in case of default.

Life InsuranceThis guarantee allows the bank to be refunded for the amount owed in the case of death of the insured person.

Personal guarantee. Credit holders have the possibility to ask a third party to guarantee their personal guarantee on the credit. In other words, in the case of default the bank can require that third party to pay the amounts owed.

Pledge. Another existing alternative is the pledge usually associated with financial investments. For example, in a savings account a certain amount is kept blocked and cannot be withdrawn, as a guarantee against non-recoverable default.

Forms of analysis and decision by the Banks

Banks analyze all the documentation provided by the clients and estimate the level of risk that the loan implies. Based on this, they are then willing to offer the best terms for the lower-risk loans.

Considerations analyzed

Effort Rate

In this regard the banks calculate the percentage of the household's income that is to be spent on the installment(s). This calculation takes into account the installments that already exist from other loans or financial commitments. If a household's gross monthly income is 2,000 euros, it should not have to pay more than 35% effort rate, that is, 700 euros in monthly installments.

DSTI

The DSTI is very similar to the effort rate. However, it compares net income with the household's current monthly expenses such as installments, water, electricity, communications, etc. This figure should not exceed 50%.

LTV

Banks are usually willing to lend 80% of the value resulting from the appraisal of the property.

Professional activities

More important than the actual profession, what matters most to the bank is the type of contract status. Permanent or temporary contracts are taken into account.

If the loan requirements are mostly met, the bank should not reject the proposal and will then proceed with the terms and conditions.

Taxes

Naturally, when buying a house, taxes will be due. Namely, IMI, IMT and IS.

For more information regarding these taxes please take a look at our IMT and IS simulator.

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