The First Time Home Owners Guide – Jamaica
STEPS TOWARDS Home Ownership – A Guide
You’ve decided to buy a house. Congratulations! The road ahead of you will be long and require patience. I bought my first home about five years ago while simultaneously trying to sell my parents’ home on their behalf, and let’s just say they were both no easy feat! I want to share my experience from being on both sides of the transaction and my experience with working for the number one mortgage provider in Jamaica.
Buying a home can seem complicated but you should not hesitate to ask your mortgage representative several questions on the process and what it entails. Here are a few I think you already have on your mind:
1. What is the down payment required?
2. Can I afford it?
– What fees do I have to pay if I want to purchase a home?
– If I want a house valued at $XX how much will I have to pay in a monthly mortgage?
3. What does the process entail?
4. What do I do first?
Was I right? Well if I wasn’t, I know that you probably are asking those questions now. I can help you out with a few of the answers to guide you along this process, but first I have to ask you a few questions to get you thinking about this decision.
Do you have access to a NHT Benefit? If yes, you can qualify for up to J$6.5 Million (or $13 Million for joint applicants) towards the purchase of your home at a rate of 5% (for new properties). If not you will have to pay the market rate which is around 8% at the time of writing.
Do you know what real estate prices are for the area you wish to live in? If not I suggest you start doing some research on house prices by accessing the Sunday Gleaner Classifieds or contacting a Real Estate Agent from a reputable company to assist you in identifying what a house will cost.
Cash or Mortgage? Will you be financing the purchase with your own funds or will you require some financial assistance from a Bank or Building Society? If it is the latter then I will help you understand what is generally required to do so.
So now time to answer your questions.
Q1. What Down Payment is Required?
A. The developer or owner you are purchasing from will indicate how much they require as security so that they don’t sell the property to anyone else while you are going through the loan or legal process. Before you make any payment, I encourage you to contact a reputable law firm to make the payment on your behalf and to draft a Sales Agreement between you and the seller. This is an important step to protect both you and the seller, which will outline what will take place if for any reason the sale falls through e.g. if you are unable to qualify for the mortgage.
The bank will also tell you the maximum they will lend. With the recent policy changes to encourage home ownership which were announced by the Prime Minister in the 2019 Budget Debate, banks are now lending up to the full sale amount, with a portion secured by the property and a portion as an unsecured loan. The amount secured by the property may still be 90% of the sale price (so the unsecured 10% will be loaned to you at a higher interest rate).
Q2. Can I Afford a Home?
A. It depends.
If you are buying cash this question is a little easier to answer. You simply have to know the value of the house and budget about 15% of that value for additional fees and charges.
Affordability in the context of receiving a mortgage is characterized not only by your ability to find the down payment, fees, closing costs etc. but your ability to have enough money for the monthly mortgage payment, the insurance and to have enough left over to live comfortably and pay for incidentals (maintenance, leaks, repairs etc.). A phrase you will hear your bank reference is your debt-service-ratio. This means the % of your salary you have available to pay for your everyday expenses, after you pay your debt obligations (mortgage, car loan etc.).
So how do you know if you can afford it? A simple way to assess what the mortgage will amount to is to use an amortization calculator like the one I created here: Mortgage Calculator and Amortization Schedule. Download the sheet and input the amount you wish to borrow and adjust the variables in the blue boxes as necessary. The yellow line will tell you your monthly payment.
After you calculate the Total Monthly Payment, compare that to your gross monthly salary. If the payment (plus any other loans you may have) divided by your salary is less than about 50%, you should be able to afford the mortgage and to live a comfortable life as a new homeowner. The bank will make further assessments on this, but this is a general guideline.
Some general rules about how a mortgage is calculated:
1) The longer the repayment period, the lower the monthly payment
2) The lower the interest rate, the lower the monthly payment and
3) The larger the initial down payment made, the lower the monthly payments.
The Mortgage Amortization Schedule (also located in the Mortgage Calculator) will tell you what your expected loan balance will be over the life of the loan. I use the schedule to compare to my mortgage statements so I can know if things look correct. If you make any lump sum payments, your loan balance will be reduced by that amount and you will pay off your loan faster. Try it out!
Mortgage Amortization Schedule
Saving up to buy a house is always the better option as it shows the bank that you are committed to the purchase and will not renege on your monthly obligations and you will pay less in interest and fees.
House Purchase Related Fees
There are several fees involved in the purchase of a home. Here are a few you will encounter:
– Stamp Duty ($2,500 each) – Seller and Buyer
– Transfer Tax (2%) – Seller
– Legal Fees (approx. 3% each) – Seller and Buyer
– Sales Agreement – (0.2% each) – Seller and Buyer
– Real Estate Agent Fees (3 -5%) – Seller
– Registration Fee (0.25% each) – Seller and Buyer
– Land Survey Fee – Buyer
– Property Valuation Fee – Buyer
You can use the third sheet of the Mortgage Calculator Workbook to estimate these fees.
In addition to those there are Mortgage Related Fees including:
– Credit Report Fee
– Stamp Duty on mortgage and copy mortgage: 0.625% plus $110;
– Registration Fee: 0.25% of loan amount.
– Legal Fees: 1% to 2% of loan amount + GCT.
These fees are collectively referred to sometimes as the Closing Costs which are all borne by the Buyer.
Here is a brief overview of what some of these fees are for:
Stamp Duty and Transfer Tax
Usually paid on your behalf through your legal representative, these fees are to pay the government to transfer the property and register it to the new owners. There was a recent revision to how this is calculated as explained in my article How To: Calculate the Savings from Reduced Stamp Duty and Transfer Tax. Stamp Duty is now a flat fee of $5,000 and Transfer Tax is now 2% of the value of the property.
For the persons selling their homes, note carefully that this value can be HIGHER than the amount you are selling the property for i.e. the tax office can decide to used the market value of the property and not the sale price. I have had a personal experience where the property was being sold for one price and when it went to the tax office for assessment, they indicated that had to assess the value of the home for almost $20 million more than the sale price, which pushed up the transfer tax and stamp duty drastically, resulting in that sale falling through but that’s another story.
Typically also paid on your behalf by your lawyer. This is to register the Title of the property with the Registrar of Titles.
Land Survey Fees
A mortgage company will want to ensure that the land that’s being used to secure the property actually exists and it is where you think it is. A licenced land surveyor can tell you the boundaries of your property and the square footage. Why do they do this? Image you thought you were purchasing a property that’s half an acre when its only legally a quarter acre? That affects the property value and the price you’re about to pay. The way to make sure you are getting value for money is by doing a Land Survey. Mortgage companies require this document to provide you with a loan.
Property Valuation Fee
For you to know how much your property is worth, an experienced valuator will go to the property, do an assessment of size and amenities and then calculate the market value based on similar property prices in the area and other factors. This is a compulsory exercise if you are obtaining a mortgage, so that the lender knows the true value of the asset that they are giving you a loan for.
Q3. What Does The Process Entail?
A. Of course if you are buying the house cash, it is much quicker to purchase a home. After identifying the property (which is the hardest part), your lawyer will draft the necessary documents, pay the required fees and transfer the property in your name. This may take a few days to weeks depending on a number of factors and if the property is ready i.e. has a title and other key documents like a valuation, land survey etc.
As a mortgage customer, the process will involve submitting documents to your lender to prove that you are who you say you are, that the property exists and can be used as collateral for the loan and to determine if you can afford the loan. This may take a few weeks as getting each document may take time. The typical documents and their purpose include:
- A Land Survey – Done by a licensed Surveyor, the diagram shows the boundaries of the property
- A Valuation – Done by a licenced valuator, shows the estimated market value of the property
- A copy of the Title of the Property – To see if there are any other lenders who have rights to the property etc.
- Proof of Identity
- Proof of Employment and Income
- Credit Report (requested directly from Bureau) – To assess your credit behavior (I suggest anyone taking a mortgage access their free credit report from CRIF or Credit Info)
- Other NHT related documents, if you are accessing a loan through Joint Financing with the NHT.
Q4. What Do I do First?
Search around for property prices to get an idea what types of properties you can afford. Use the mortgage calculator to help.
Ask your mortgage provider for a pre-approval letter then look for a property in keeping with what you can afford. The letter will indicate how much you can borrow and how much you can pay each month based on a quick assessment of your affordability. You can often use this pre-approval letter to show a seller that you are serious about the purchase of a home.
A reputable Bank or Building Society should be selected as your mortgage provider. Also remember what I said earlier about the lower the interest rate the less you will pay e.g. for a $10M property the difference in interest of 7% vs. 8% will translate to $2.6 million more paid in interest over the life of the loan.
Use a Real Estate Agent to assist in finding a home in the desired location at your price point. This may not always be easy to do, so have patience. Using an agent will assist with the process, especially if you don’t have the time and patience to scour the newspaper or online every day for houses listed on the market.
I hope this helps with understanding the process but please seek the advice of a lawyer for this transaction and confirm any rates and fees with your financial institution.
Look out for my next article on What is a NHT Benefit and How Do I Access It?!