Bank Financing: Understand the Appraisal

I'll make this a short post, just to clarify some things about the bank financing appraisal process.  Mostly for my benefit really, so I don't forget haha!

So, let's say you want to buy a townhouse unit from a seller.  The seller agrees to 20% downpayment and bank financing, because really, it's the same banana, and the seller will get paid anyway.  The question is, what do you do to get bank financing?  Well, first of all, go to a bank and ask them for their requirements for the appraisal.  That would usually be a certified copy of the TCT (or CCT if condominiums), etc.  You will also have to pay for the appraisal fee (typically 3 - 3.5K within Metro Manila).  After a week or two, the bank will then let you know how much the property is worth according to their appraisal (fair market value) and up to what percentage they're willing to finance it.  Typically, banks will finance up to a maximum of 70% of the appraised value.

Now here's the tricky part:  the appraised value vs. the selling price.

Don't expect the appraisal value to match the selling price.  In most cases, the appraisal value will be less than the selling price.  So going back to our example, if the seller was selling the property at 5M, and he agrees to a 20% downpayment, but the bank only appraised the property at 4M and will only finance 70%, that means you have to shoulder the difference and that will be your downpayment amount.  To illustrate:

20% of 5M = 1M -> this was supposed to be your downpayment (equity)
70% of 4M = 2.8M -> this is what the bank will finance (loan)
5M - 2.8M = 2.2M -> this is what you will actually have to pay as downpayment (equity)

The reason why developers are able to offer bank financing that is equal in appraised value and selling price is because their properties were pre-appraised by their partner banks already.  That's why they will let you know what banks are affiliated with them.  So unless you can get a better (or same) bank appraisal elsewhere, you should seriously consider the affiliated banks of the developer.  But if you're buying a resale unit such as our example, your best bet would be to ask the seller for a discount or price cut, to lessen your equity contribution aka downpayment. 

Oh, and yeah, the most important factor to get bank financing:  your financial status.

How do banks determine how much you can afford?  They'll look at how much you're making in a month, and will lend you an amount that you can pay off with 30% of your net income, subject to how long the loan will be.  If the property you're loaning for is not within that margin, then you don't get the loan.  Simple eh? Hehe.

Did I say this was going to be a short post?  Ooops.

Don't put your eggs in one basket,
Jon