The loan approval process for home financing

Consumers often need external funds to finance real estate such as a house. Banks and financial service providers provide the needed funds for a house purchase through long-term mortgage financing.

The process of financing a house, however, differs from a normal loan. The granting of financing for a home is extensively reviewed by lending institutions in advance. Borrowers should also consider many aspects to make the home financing affordable.

In the context of long-term home financing, lending institutions often grant loans of 300,000.00 EUR and more. For this reason, banks have specially trained mortgage advisors who take care of customers with corresponding financing needs.

Financing a house

Consumers who want to finance a house must explain their plans in an initial meeting. The mortgage advisor will then explain which documents are required for a loan decision.

Customers often have to provide payslips, land register extracts, construction drawings, building specifications, photos and calculations from the architect. Banks need these documents in order to carry out the mortgage lending value assessment.

Of course, the personal and financial circumstances are also checked in the first meetings. The mortgage specialist will want to find out whether the applicants' financial situation allows the loan to be granted. The advisor will give an initial rough assessment of whether financing for the house can be carried out.

Subsequently, the internal credit department reviews the request and will give a recommendation to the advisor. If the recommendation is positive, an appropriate loan offer will be prepared and an important step toward purchasing the house will have been taken.

The loan offer in home financing

The loan offer is very important for borrowers and should be examined closely. The interest rate stated in the offer is of particular importance to consumers. Usually there is a fixed interest rate for the first years of repayment. The financing offer for the house also states the monthly installment to be paid for the loan.

Any possible special repayment options are also included in this offer. A special repayment means repayment through payments in addition to the monthly installments. Typically the loan offer is time-limited, as interest rates change regularly. Borrowers should ensure that the interest rate is market-appropriate.

As part of financing a house customers should never obtain only one loan offer. Comparing different offers is very important and helps to save money. The interest rate will vary between banks. Special repayment options also often differ.

What does the interest rate in the loan offer depend on?

The cost of financing the house is primarily determined by the interest rate of the financing. Consumers usually have little influence on the level of the interest rate. It is nevertheless dependent on various factors.

The interest rate is fundamentally determined by developments in the money and capital markets. If interest rates on the capital market are very low, borrowers will generally receive a very low interest rate.

In this case it is important to agree on as long a fixed interest rate period (fixed-rate period) as possible and high special repayment options. If consumers receive high interest rates, a short fixed-rate period is advantageous. Some banks grant loans for financing a house with variable interest. Variable interest rates are only advantageous if the market rate is very high and rates are likely to fall significantly.

Creditworthiness: the key to financing a house

The interest rate for financing a house also depends on the creditworthiness of the applicants. Banks and financial service providers normally grant loans with higher interest rates to customers who have poor creditworthiness.

Customers with very good creditworthiness receive better terms. In this context, one can speak of creditworthiness-dependent interest rates. The value of the collateral also has a major influence on the interest rate.

Collateral and equity in home financing

Every home financing is extensively secured by banks and financial service providers. Collateral is provided by registering land charges on the financed property. The mortgaged property is usually the financed house.

The value of the house is calculated by a mortgage lending value assessment. If loan installments can no longer be paid, a financing bank can auction the house. The sale proceeds are then used to repay the outstanding loan amounts.

The mortgage lending value assessment can also have a major impact on the interest rate. Banks will grant more favorable interest rates when the home financing is fully secured. If a house is built for 200,000.00 EUR, financing sums of 200,000.00 EUR are often required.

However, banks apply safety discounts in the mortgage lending value assessment. The property is often valued lower by banks. If a bank, for example, values the property at 180,000.00 EUR, parts of the financing are not secured if there is no equity. The terms for that part of the financing will be higher. Financing without equity is also called full financing.

For this reason, the use of equity in home financing is very important. If consumers have 50,000.00 EUR in equity, the financing amount can be reduced to 150,000.00 EUR. In this case the entire financing is secured. The interest rates will then be lower.