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Creditworthiness

Despite the fading crisis, banks still have a restrictive approach to the requirements that a potential borrower must meet. Find out for what reasons the bank may refuse you a mortgage loan for real property acquisition and how you can remedy it.

The most frequently encountered problem when applying for a mortgage loan is insufficient creditworthiness (i.e. the maximum mortgage amount that a borrower may apply for in a given bank). It should be emphasised that each bank calculates creditworthiness in its own way. Therefore it may turn out that not having sufficient creditworthiness for a required amount in one bank we can obtain it, even with a safe reserve, in a branch of another bank just over the road.

What to do in a situation when our remuneration is relatively low and no bank agrees to grant us a mortgage loan of the required amount? If we have financial liabilities, it would be good to close them (or to declare their closure). All credit cards, overdrafts on the account, credits, loans, and sureties are treated as a monthly burden and influence reduced creditworthiness.

If this is not sufficient, a typical solution is adding extra people (family members) to the mortgage loan. Since the vast majority of the banks define the maximum crediting period based on the age of the oldest applicant, it may turn out that this period is shortened. There is still a remedy to this challenge – there are some entities on the Polish market (e.g. Kredyt Bank) that allow consideration of the age of a younger applicant.

Example

The married couple, Mr. Michał (31 years) and Mrs. Katarzyna (27 years) may obtain a mortgage loan in Bank Pekao S.A. for 30 years (this is the maximum crediting period in this bank). Assuming no earlier loan repayment, Mr. Michał and Mrs. Kasia will repay the last instalment at the age of 60 and 58. That is good because in accordance with the bank procedures, the bank grants loans until the age of 70 years of the oldest borrower. If our married couple would wish to add their uncle (52 years) to the mortgage loan, the maximum crediting period in Bank Pekao S.A. will be then 18 year. The new instalment for the mortgage loan with a relatively shorter repayment period may turn out to be excessively high for our couple. However, applying for a mortgage loan in Kredyt Bank, the age of Mrs. Katarzyna will be the reference one. In this case, the crediting period may reach even 30 years, and the instalment may be equally low as in the case of a mortgage loan without the surety of an older third person.

Another method to increase creditworthiness is the prolongation of the crediting period from the standard 30 years to the period of 40 years, or even 50 years. Unfortunately, the decrease in the amount of the instalment, and thus the increase in creditworthiness will be rather slight. On the other hand, the interest that we owe to the bank will increase significantly. For this reason, this solution is rather not recommended.

The resignation from a mortgage loan in a foreign currency and focus on the domestic currency seems to be much easier. Due to poorer availability of Euro and Swiss Franc on the interbank market, and also restrictions of the financial supervision, creditworthiness in Polish Zloty is usually considerably higher.

Ultimately, you can also consider a mortgage loan based on declaration. In this type of product, banks do not directly examine the incomes of the applicant, however it secures the mortgage loan against the real property of much greater value that the mortgage loan, offered by the borrower. The credited LTV level may drop in such cases to 50% or even 30%, which significantly reduces the amount that would be obtainable. Due to the fact that we “declare” the level of income i.e. we write in the form not presenting any confirmation in bank statements or certificates issued by employers, banks charge steep price for the incurred risk related to lack of certainty that we actually receive such income. This results in the fact that only very determined people in need decide for this type of mortgage loan.

Lack of personal contribution is gradually becoming a smaller problem. At the moment, borrowers may be granted a mortgage loan without personal contribution both in Polish Zloty, and in a foreign currency. Nevertheless, the selection of banking offer will be much broader (and the offer will be noticeably better) in case of possessing personal contribution at the level of 10%. However, there is also a remedy for this. The banking regulations do not unanimously imply that the personal contribution must be in cash. This could be for example a real property (the bank may establish a security both on the acquired real property or another real property). Moreover, it does not have to be our real property – it could be the real property of a third party. Obviously, consent of the owner for establishment of mortgage will be required in each case. A less frequently applied, however still permitted solution, is the establishment of a security on possessed shares, interest or bonds.

Paraphrasing the Polish proverb, one may says the crisis is not as bad as it is painted. Although banks impose some requirements for the borrowers, in the majority of cases it is possible to solve these problems. After all, more important than the mortgage loan price parameters is the price we pay for the real property. And when will it be lower if not during the crisis?

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