Guide on how to apply for a mortgage

Find out the steps you must follow to request a mortgage
Taking out a mortgage is a long process that requires effort and dedication. Taking time to gather information and carefully study the options and possibilities is essential to achieve the best financing. This is why this guide seeks to explain every step, making it a little easier for you to enjoy your new home as soon as possible.

Gather information and compare

If we have already decided to buy a home and we need a mortgage, the first thing we need to do is to gather all the available information beforehand to avoid making a wrong move. It is important to know the status of the mortgage market, so we must search for, compare and study the offers of as many banks as we can.

As buyers, we must think about what mortgage best suits our needs: if we will be able to service the periodic payments, the repayment term, see what our savings are and add some margins for unexpected expenses. With this in mind, it is recommendable to know our level of indebtedness and ensure it does not exceed 30-35% of the title holder's net income.

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In this first step towards taking out our mortgage, the key is to compare. Upon consulting different mortgage offers from different banks or from the same bank, we will be able to establish differences and better understand what they offer us.

During this information-gathering process, it is advisable to point out all the possible questions to then ask the professionals. In the conditions and requirements of a mortgage, we find terms that can be difficult to understand and that can even confuse us. Let's see some of the most important ones.

Types of mortgage loans

Fixed-rate. For fixed-rate mortgages, the monthly payment and the interest rate that applies will not vary throughout the life of the loan. The same amount is paid every month, even if the market interest rates go up or down.

Variable-rate. In the case of variable-rate mortgages, the interest rate is most commonly linked to a reference rate (usually the Euribor). Therefore, the monthly payment will vary with the Euribor.

Mixed-rate. These mortgages apply a fixed rate during the first few years of the loan, and later switch to a variable interest rate linked to the Euribor.

What you have to pay attention to in order to take out your mortgage

Following this information-gathering process, we can start to look closer at the cost of our mortgage. Here, three important terms come into play: NIR, APR and Euribor.

The NIR is the acronym for Nominal Interest Rate, which is the price that institutions charge for lending money. This interest is calculated by applying a percentage or rate to the capital lent to the customer. This percentage is applied to the capital outstanding at any given time. It does not include expenses and fees.

The APR is the acronym for the Annual Percentage Rate, the interest rate that indicates the effective cost of a loan over a set period. It is calculated according to a mathematical formula that takes into account the nominal interest rate of the operation, the frequency of the payments (monthly, quarterly, etc.), the banking charges and some expenses generated by the operation. It allows us to compare the effective cost of the same product between different offers.

The Euribor is an index that indicates the average interest rate at which the main European financial institutions lend money between each other in the short term, hence it fluctuates constantly. This constant oscillation of the Euribor is what dictates the fluctuation of the monthly installment, which is usually revised half-yearly or annually.

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The associated fees

Another very important aspect within this mortgage selection process is the associated fees. Besides having to pay a monthly installment during a period that usually ranges between 20 and 30 years, depending on the bank where we take out the mortgage we will have to pay one set of fees or another. Let's see some of the most common ones:

Commitment fee. This is calculated on the total amount of the mortgage. This fee is paid at the start of the mortgage to compensate the banking institution for the procedures and formalities of arranging the loan.

Fee of the account associated with the mortgage. Some banking institutions require us to open an account which will be used to serve the installment payments. This fee is not charged by all banking institutions and if we are already customers of the bank that is going to grant us the mortgage, this fee does not usually apply.

Fee for partial or total repayment: this occurs when the customer pays all or part of the outstanding capital in advance. It is the compensation to the banking institution for the administrative procedures it has to carry out, as well as for what it will no longer receive as interest on the capital yet to be repaid.

Most common requirements to obtain a mortgage

The main requirements that are asked for when granting a mortgage relate to the customer's financial solvency, although these are not the only ones.

- Have fixed incomes. Financial stability is key for any mortgage being granted. Our bank will ask us for pay slips and about our working life in order to better understand our income flows.

- Make a down payment of at least 20% of the home's value. This is known as the “deposit” and it is a requirement that banks ask from their customers. This is why it is very interesting to know the approximate appraisal value of the property, as it is usually a “cut-off amount”. In accordance with Royal Decree 716/2009, on regulation of the mortgage market, a maximum limit of financing allowed for loans and credits is established, which usually means that a financial institution will not grant mortgages for more than 80% of the appraisal value.

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