Oran Hall | Using property to get a loan

QUESTION:

How can I use my land title as an investment tool or to get a loan?

- Ackeem

FINANCIAL ADVISER:

A loan against property belongs to the secured-loan category where the borrower gives a guarantee by using his property as security. This is an effective way to use the millions of dollars being stored in your property to help you meet your financial needs and obligations and raise money for other productive purposes.

Financial institutions, including commercial banks and credit unions, will lend you money for business expansion, other business activities, education, and home improvement. They will lend for other purposes, too, but it is more prudent to use the valuable equity in your property to borrow to do productive things rather than for consumption if you want your property to really work for you.

The big advantage of a secured loan is that it is cheaper than an unsecured loan, and while it gives the lender protection in the event of your failure to service the debt satisfactorily, it puts you, the borrower, at risk of losing the property in the event that you are not able to abide by the terms of the loan agreement. You should therefore be careful in committing to give a lending institution a mortgage against your property.

The eligibility criteria will vary from one lending institution to another, but, from all the host of factors, there are common factors that they look at. These include your income, debt obligations, employment, the market value of the property, and your repayment track record for other loans, including credit cards.

To support the above, lending institutions generally require the following: a copy of each of the last three salary slips, or bank statements for the last 12 months if you are self-employed; a copy of your last utility bill (electricity, water, Internet or phone); the registered title of the property; a valuation of the property; surveyor's ID report; and a credit report.

LOAN SUM

The maximum sum you are eligible to borrow is determined by your income and the value of the property. Your income is important as it determines your ability to pay, and lending institutions protect themselves by lending a sum that is a certain percentage of the market value of the property.

The location of the property is important as it is a major factor in determining its value and the ease with which it can be sold if it becomes necessary to do so. Lenders are not enthusiastic to lend against property that is hard to repossess.

The first step towards using your land as collateral is to identify a series of compatible lenders. Then, assess and compare their loan terms and conditions. Always ensure that you find the best possible terms, which include important parameters such as the amount you can borrow, the rate of interest, and the term of the loan. Be careful and deliberate in making your decision. You should not rush to make it or allow yourself to be pressured to make it.

It is quite possible that an appraisal of the property will be required before the loan is approved. To do this, you will need to hire a professional appraiser who has been approved by the lender you have selected. Once the value of your property has been finalised, the lender will be able to provide you with loan terms that you can either accept or reject as you see fit. After the appraisal is completed, the lender will likely check to see if your property carries any additional liens or debts, and this could directly affect the likelihood of the loan being approved.

Although the steps that you take to secure a loan using property as security are important, how you use the funds is more critical. Such funds are best used to acquire long-term assets capable of increasing net worth and, as much as possible, to generate income or to improve your capacity to earn higher levels of income in the future.

- Oran A. Hall, the principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. finviser.jm@gmail.com