Buying a home is the biggest purchase most of us will make in our lives. Yet many people rush to buy a property with less preparation than they would planning a holiday. This can have financially disastrous consequences, especially in light of the measures announced by the government on August 30th 2010, which have created a lot of uncertainty in the market’s direction.
Follow the steps I’ve laid out below when buying a property and you will be much less likely to make an expensive mistake.
Buying a home is often an emotional decision. That’s fine – just make sure it’s a rational one too. Honestly ask yourself if you need to buy a home, and whether renting might be a viable option.
First look at how much money you currently have, including cash and CPF. Note that based on the government’s property measures, if you already have at least one loan outstanding, your minimum cash outlay will increase from 5% to 10%. Next figure out how much you can borrow, taking all your outstanding debts into account. You can work with a banker, or use the affordability calculator available on Loanguru. Most banks will only lend up to a 35-50% Debt Service Ratio (your total debt payments divided by your monthly income).
What are your current and future needs for housing? For example, a newly married couple that buys a studio or one bedroom might find within a year or two that they need a two or three bedroom apartment once a baby is on the way. Would you prefer HDB or private property, if you can afford it? Which districts or areas do you prefer to live in? What are the amenities and public transportation options you want?
You can choose to either use a buyer’s agent and/or go DIY. Look at both offline (e.g. classified ads in the newspapers) and online (property websites) sources to get the largest pool to choose from. Based on what you’ve figured out from Steps 2 and 3 above, come up with a list of potential projects to consider.
Check the recent transacted prices of these projects from the URA website. Compare prices there with surrounding projects. Compare the transacted prices with the asking prices. If you are buying for investment, look at the market rents and rental yields. Eliminate the projects that do not look attractive.
Based on this smaller list of projects arrange viewings of at least a few different units in each project. It’s helpful to take photos and notes to help you remember what you saw. Visit each project at different times of the day and night to see if it is noisy or otherwise unpleasant. Narrow down your list to your top few units and do a second viewing if necessary.
Don’t miss this critical step! Before you make an offer ensure that you have gotten an indicative valuation from a bank and an in-principle approval for a mortgage. You can approach the different banks yourself or use a mortgage broker to save time. Based on the new measures, if you already have an outstanding loan your Loan To Valuation (LTV) limit has been lowered to 70% from 80%, so you’ll need to cough up more cash.
Also, banks will only lend to you based on the LOWER of the valuation limit or purchase price, so if you are buying above the bank’s valuation you will need to pay the difference in cash. If you are selling your existing home to purchase a new one and hope to borrow at 80% LTV, you now need to present proof to qualify (in the form of a signed purchase agreement for your current home and certification showing that stamp duty for your existing property has already been paid for by the buyer).
Once you get the indicative valuations and at least one pre-approved mortgage from the banks, you can then make an offer knowing you can borrow what you need. There have been a number of unfortunate cases of buyers who have lost their deposits because they realized later that banks would not finance their purchase. When negotiating the purchase price, it helps to have a number of options on hand so you are not forced to overpay due to a lack of options.
If the seller accepts your bid, typically you have to put down a 1% deposit to get the Option To Purchase (OTP), and have 14 days to exercise it, by which time you will have to pay another 4% of the purchase price. Make sure you have the funds on hand to do so. Once you get the OTP liaise with your conveyancing lawyer and mortgage banker to settle the procedures.
Before the completion date, do an inspection of the home to confirm that all agreed on fixtures and items are still around. On the date itself, collect the keys and check that you have a complete set. Congratulations! You are the owner of a new home. Time to think about renovation and furnishing…