Buying real estate with a bank loan

Buying real estate with a bank loan

Buying a real estate is a big, often life investment for which considerable financial resources are needed. Most potential buyers do not have such financial resources and are forced to obtain them. 

The most common way for buyers to find the money for real estate is to take the loan in the bank. Often, the available funds and the ability to take loans are limitation factors in selecting and buying the desired real estate. 

Not every person can get a loan. Banks approve loans only to those clients who will be able to repay it one day. Below you can find out what you need to get your bank loan and how the bank decides whether you are a desirable client. 

General about residential loans 

Residential loan represents a purposeful long-term loan that can finance the purchase, construction, extension or arrangement of real estate with certain annuities in the repayment period. Banks grant residential loans to their clients by requiring various insurance instruments such as pledged property rights, insurance policies, and guarantees. Loans are usually approved by using mortgages, i.e. the pledge of the bank on the real estate. 

Loan repayment period is typically 20 to 30 years. If you decide on a longer repayment period, the interest rates on the borrowed funds are variable. On the other hand, short-term funds carry fixed interest rates. 

Once you find the real estate that interests you, you need to explore what kind of lending models are offered in Croatian banks. The choice of the bank and the model of residential loan is to a large extent influenced by the creditworthiness of the future borrower. 

Steps needed to obtain the loan 

Getting a loan is not a simple process and consists of several steps to follow: 

  • Provide the necessary documentation

In order for a bank to determine your creditworthiness, the bank needs the documents that serve as a proof. The type of documentation to be submitted when submitting a loan application depends on the type of loan applicant, the status of the employment of that person, the type of company in which the loan applicant is employed, etc. 

The loan applicant is required to submit the following documents in minimum: a copy of the ID, lists, information on pension status, forms, employment contracts, BON1, BON2, JOPPD forms, employer's employment confirmation, etc. Apart from the documents proving the creditworthiness of the loan applicant, the loan seeker is required to provide additional documentation to prove the purpose of the requested loan. 

It shall be furnished by a pre-contract or a sales contract. The contract of purchase at this stage does not have to be verified, but before the loan is disbursed, the borrower will need to take care of the contract verification. Also, banks are important as well as property seller data, referring to ownership (original land registry not older than 10 days) and technical (copy of energy certificate) documentation. If you need additional documentation, your bank will contact you. 

  • The Bank conducts an assessment of the creditworthiness of the loan applicant and the assessment of the market value of the property

Upon receipt of all required documents, the bank initiates a procedure for assessing whether you are a good candidate for obtaining a loan, i.e. estimates your creditworthiness. You are creditworthy if you receive regular monthly income in the amount of annuity and unpaid income (social minimum) to cover minimum life needs. 

The amount of unpaid income needed to settle life needs varies from bank to bank, but ranges from 2100 to 4000 Kuna. This was the first step in assessing your creditworthiness. 

Furthermore, the bank checks whether the borrower is in charge of other credit institutions and whether you settle your monetary obligations timely. Then they check your position in the company where you are employed, whether you are employed indefinitely or determinately, what is the length of your employment, whether the company you are employed in is solvent, etc. 

The banks also ensure that all beneficiaries of their loans at the final maturity date are not older than 70 or 75 years. After checking the creditworthiness of the borrower, the bank initiates verification of the property itself by estimating its market value. Real estate prices are usually volatile and change over time. That is why banks demand that the estimated market value of the real estate are at a certain percentage higher than the amount of the loan requested. 

As a rule, the value of the property must be 10 to 25% higher than the amount of the loan requested. Sometimes banks approve loans that are equal to the real estate market value, but in these cases banks require additional security measures such as their own participation or coinage involvement. This step also requires your coinage whose height depends on the type, size and location of the property. For example, a flat rate of up to 50 square meters is 1300 Kuna, for apartments up to 100 square meters goes up to 1500 Kuna. 

Estimating the house is somewhat expensive and depends on the number of floors. One storey house is estimated at 1900 Kuna, and for each additional floor it is necessary to allocate 250 Kuna more. 

  • The bank approves the loan

If the bank has determined that you are a good candidate for loan approval, after the credit assessment and the market valuation of your desired property, starts the procedure of granting the loan itself. 

A bank employee handles a credit request and sends that same request for approval. Upon receipt of a decision on the approval of a residential loan, a bank employee submits a loan application to the legal service of the bank to prepare documentation for approving the mortgage. Such documentation shall be signed by the user of the loan, the seller of the real estate, and for the bank the pledgee debtor who with his signature permits the registration of the mortgage. 

Loan seekers should re-allocate funds for the solemnization of loan contracts according to the tariffs of the notary public. Notaries will charge your service on an average of 2500 to 4000 Kuna, depending on the amount of the residential loan, the number of participants in the loan and the loan insurance instruments. 

  • Defining real estate and loan instruments

Before the loan is disbursed, the borrower is required to pay to the bank the property insurance instruments and potentially additional loan insurance instruments that will be valid for the duration of the loan repayment. Thus, the real estate will be assured from potential natural disasters and other risks. Insurance premiums for flats usually amount to about EUR 50 per year, and for houses around EUR 150 per annum. 

In addition to securing real estate, the debtor itself is secured according to the model of the approved loan, which depends on the ratio of the amount of loan requested and the estimated value of the property so that in the event of casualty, death or permanent disability of the user, the insurance house could settle the remaining amount of the loan. The insurance premium averages between 40 and 150 euros a year. 

  • Registering mortgage in the land register

Once a loan applicant has successfully concluded a Residential Loan Agreement, the borrower is obliged to submit a solemn contract to register a mortgage. The land register will issue a Mortgage Solution to the borrower on the basis of the submitted documents and issue a new owner's listing. The user of the loan is obliged to submit to the bank the documents issued by the land register. 

  • The payment of a residential loan to the seller's account

After the bank has received loan insurance instruments, a certified sales contract, documentation from a land register, and a loan agreement, a bank employee announces the payment of a loan for a certain date. The loan is paid in accordance with the purchase agreement, and the date of payment is determined by the borrower. 

In this way, the user can avoid the costs of intercalary interest which is part of the regular interest payable on the amount of the loan for the period from the day the loan is paid until the first monthly annuity. The maximum amount of intercalary interest is somewhat lower than the amount of the contracted monthly annuity and the user pays the loan from its own funds. 

  • Register a new customer's property in the land register

Once the real estate buyer has completed the process of obtaining a residential loan and bought these properties from the seller, it is necessary for him to register as the owner of the property in the land register. He needs a tabular document that represents a verified statement that the seller permits the transfer of ownership to the buyer and authorizes him to be registered as the new owner of the property. 

  • Pay a real estate sales tax

No later than one month after the purchase of the property, the new owner is liable to pay real estate tax in the amount of 5% of the estimated market value of the property. For the first property purchased, there are also tax incentives that depend on the size of the purchased real estate and the number of household members. 

Real estate brokerage assistance 

Not only when looking for real estate, conducting negotiations, acquiring ownership and technical documentation, but also when applying for a residential loan, real estate agencies can help. Contact us and we will help you get the funds to buy the desired property.