Real estate finance: Requirements for obtaining a mortgage loan

Income situation

A regular income is important for financing a property. This income should be at least 2,500 euros net. On the one hand, the level of income should ensure monthly payments to the bank, and on the other, it should cover possible rent losses or maintenance costs.

Banks also want to see that future rental income is not the only source of income. At least if it is the first property, other types of income should also be available. A permanent employment contract or several years of successful freelance or self-employed work are a good basic requirement for the bank to approve a loan.

Equity

In addition to the minimum income mentioned above, a certain amount of equity should also be available. As soon as the application for real estate financing has been submitted, the bank calculates the value of the property and can thus assess whether the purchase price and construction costs are reasonable. The property itself often serves as collateral, for which a land charge is entered in the land register.

The higher the value of the property, the lower the risk from the bank’s perspective. The amount of equity required generally depends on the purchase price and the corresponding ancillary purchase costs. In practice, these usually amount to 5 to 8.5% of the purchase price (depending on the respective federal state).

Example

A property in Munich that costs 300,000 euros. The ancillary purchase costs in Bavaria amount to 5 percent of the purchase price: Notary fees and land register entry 1.5%; land transfer tax 3.5%. In this case, the ancillary purchase costs therefore amount to 15,000 euros.

If you have the means, it may make sense to contribute more than 10% equity:

• If you are older and want to pay off the mortgage more quickly, it may be advisable to contribute more equity.
• If you are younger but have a lot of equity, you could consider a larger property at a higher purchase price.
• Another scenario would be to invest in several properties and thus use the equity as efficiently as possible, resulting in a significantly higher return on equity.

For example, we could put together a portfolio consisting of two smaller properties. How much equity is ultimately invested in an investment property depends entirely on your ideas. We will be happy to advise you on this.

Construction financing without equity

In certain cases, the following advice applies:

Only contribute as much equity as necessary and as little as possible at the same time – keyword equity leverage.

The increased use of debt capital in real estate financing can increase the return on equity. This can lead to profit maximization, but can also be classified as riskier depending on the individual situation.

A distinction is made between 100% and 110% financing. With the former, the entire purchase price of the property is financed via a loan – without using any equity. The loan covers the entire purchase price. 110% financing also includes the ancillary purchase costs. The closer the loan amount is to the purchase price, the more risky the loan is for the bank. It is therefore not surprising that banks require further conditions in addition to the basic requirements for this type of financing. These include:

• An excellent credit rating,
• A promising and valuable property (good location, condition),
• A willingness to accept higher interest rates
.

A clean credit rating

Schufa provides information about a person’s creditworthiness. Among other things, the following data is kept in this directory:

• Existing loans
• Current accounts
• Open receivables
• Existing contracts (cell phone, internet…)

With every new credit application or conclusion of another continuing obligation (e.g. a cell phone contract), the seller will regularly check the Schufa to assess the customer’s creditworthiness.

A negative Schufa entry, for example in the form of a terminated cell phone contract due to non-payment, worsens creditworthiness. The worse this is, the less likely it is that a bank will finance the real estate project. Negative Schufa entries should be avoided as far as possible in order to demonstrate trustworthiness and reliability to contractual partners.

Positive balance sheet

In addition to the points mentioned above, a bank usually also looks at account movements. This involves not only incoming payments, but also everything that goes out of the account. This includes contributions for health insurance, leasing installments, rent, etc.

Nevertheless, a high income is not a good prerequisite for real estate financing if the income is almost or completely consumed by high monthly costs. However, if the above requirements are met, banks can usually be convinced of the borrower’s creditworthiness.

If you’re not quite sure what your financials say, arrange a free consultation with us to go through your positions step by step. Thanks to our cooperation with more than 450 banks, we know exactly what conditions are attached to the granting of a loan. We are happy to make this knowledge available as part of a real estate investment consultation.

Conclusion

The right financing strategy is just as individual as the investment decision itself. Whether short-term investors who want to sell after a few years, medium-term investors who want to benefit from tax-free profits after 10 years or long-term investors who want to take their retirement provision into their own hands: Competent advice is crucial. We are happy to do this for you.