Real estate financing: how to get the best conditions
Turning bills into bricks
The what's-what of real estate financing
Playing around with the idea of buying real estate, or already have a specific property in mind that you'd like to purchase? Great! Now it's time to figure out how much money you can borrow and what your financing options are.
Lenders don't exactly make it easy for first-timers. You might be able to get relatively transparent advice from your principal bank, but you won't know if what they're offering you is really the best you can get. And comparing your principal bank against different lenders would require you to go around from bank to bank collecting offers. Here's where real estate brokers and agents come in handy. They're able to send you a wide range of financing scenarios in just a few clicks. At a glance, you can see the different interest rates, lock-in periods, and amortization schedules. Just like that, you've saved yourself a ton of time and stress, and you can rest assured that you're exploring all of your options.
To get approved for financing, you'll need to have a few documents ready. Things can move pretty fast at this point, so it's best to be prepared. For example, you'll need a copy of your ID, proof of income, and your most recent income tax statement (Einkommensteuerbescheid). The bank will also want to know about your assets, so you'll need to have screenshots or statements of your bank accounts, a current pension statement (Rentenbescheid), and proof of your insurance assets. If you already own investment real estate, then you'll need to provide information about that as well, including a current extract from the land register, your loan agreement, rental agreement, and proof of rental payments. And last but not least, you'll need to provide documents about the property you want to buy: a cadastral map, a dimensioned floor plan, photos of the inside and outside, another current extract from the land register, etc. Some banks will also want to see a draft of the purchase agreement.
Providing your personal documents and asset information makes it possible for experts to figure out relatively quickly how much money you should borrow, how much of the purchase price you'll need to finance and whether you're able to cover at least the closing costs related to the purchase.
In this article, we'll explain your options, which adjustments you can make, even if you don't have (much) equity, and when you can expect to have to pay for the property. As always, you can also write us an email if you have any questions.
Real estate financing: the basics
When you buy a house or an apartment for personal use or as an investment, you usually don't pay for the entire thing out of pocket. Nor do you have to.
Ideally, you'll already know how extensive a line of credit you will qualify for (i.e., how much money you can borrow from the bank) before you even start looking for properties. That's done with a budget calculation to make sure that your income exceeds your expenses.
If you're looking to buy a house or apartment for personal use, you can roughly expect the bank to lend you between 130 and 140 times your monthly income after taxes.
Let's say your monthly income after taxes is €1,500, and you don't have any additional income such as rent or allowances for childcare. Your line of credit would fall roughly between €1,500 x 130 = €195,000 and €1,500 x 140 = €210,000.
It's a good initial estimate that doesn't go into much detail.
However, if you want to buy a property as an investment, things start to get a bit more complicated. Here, banks use budget estimates and risk premiums to determine your creditworthiness, which enables them to gauge the likelihood of you falling into financial hardship and not being able to pay your interest or amortization. Your line of credit is then set accordingly.
Let's say you took out a loan to finance the purchase of a new car some time ago, and your line of credit already exceeds your assets. That's a risk for the bank because it increases the likelihood — on paper at least — of you not being able to make the interest and amortization payments on the property consistently. To minimize its risk, the bank gives you a smaller line of credit.
In any case, the bank will want to know the following information to determine how much you can borrow:
Your monthly income after taxes
How much equity you have
How high your expenses are
What kind of monthly cash flow you hope to achieve by renting out the property
The amounts of any other active lines of credit
To help you determine how big of a line of credit you will qualify for, we've put together a template that you can use to calculate your budget. Simply fill it out and send it to us, and we'll get in touch with the banks to collect financing offers for you.
How property financing works
There isn't one right way to go about financing real estate. Figuring out if you should go with an annuity mortgage, a combination of a loan and a loan agreement, or a subsidy program requires the help of an expert who can advise you on each of these options individually.
In any case, an interest rate and an amortization schedule will be calculated for you during the property financing process. These schedules are based on what you can pay and consider how much income you are likely to generate from renting out the property. Your maintenance and reserve funds costs are also factored in. The number that comes out at the end is how much you will have to pay each month. Ideally, your rental income from the property should be able to cover this. If you aren't sure that it will, unexpected expenses could throw your property financing over budget. For example, if your maintenance costs go up or you need to make an unexpected payment to increase your reserve funds, you'll have to cover these expenses out of pocket.
Don't forget about your closing costs! Buyers often lose sight of them in the beginning because everything revolves around the purchase price. But at 10% of the property price on average, it's quite a bit of money. The closing costs are comprised of the following fees, calculated as a percentage of the purchase price:
Land registry and notary fees: 2%
Real estate transfer tax: 3.5% - 6.5% (depending on the federal state)
Real estate broker fees: 3.5% - 6.5% (depending on the federal state)
You may also need to pay appraisal fees, which can come to somewhere around €500 depending on the size of the property and scope of work.
A tip from us: with Urbyo, you can get financing to cover your closing costs as well. The best thing is to talk to our financial experts. You can make an appointment directly here.
Financing documents: getting into the hard facts
Once you've gotten through the first step of finding a property you want to buy, and it looks at first glance like you'll be able to afford the purchase, it's time to get down to the nitty-gritty. Before a lender approves you for financing, they're going to want to look into your financial situation. And for them to do this, you have to provide a whole bunch of documents pertaining to your credit rating, your assets, and the property itself.
To help you keep track of everything, we've put together a checklist of all of the documents you'll need.
If you have other outstanding loans, you'll also need to provide proof of these. In addition to this, you'll have to inform the bank of whether you are at risk of insolvency or whether you have had any assets stripped from you by a court bailiff in the last five years.
To accurately estimate the value of the property you want to buy, the bank needs to look at a ton of information. They need to do this to protect themselves and make sure that the property's value justifies the amount you want to borrow. In the event of foreclosure, the bank needs to be sure that the amount they obtain from the auction will be enough to cover the remaining balance on the loan. But this is essentially also a way of protecting you because it determines if the asking price of the house or apartment is reasonable.
We'll handle the entire property appraisal for you to help you move through this part of the financing process smoothly. All you have to do is provide us with your personal documents. Then we'll combine everything and start contacting banks to get you the best possible financing offers.
Finding good deals on financing for rental apartments
Whether you plan to live in the apartment yourself or rent it out, financing is typically obtained through a bank. As far as the interest rate and amortization are concerned, you can expect the bank to demand a minimum amortization rate of 2% on a rental property.
If your investment property is due for restoration, you can get an excellent interest rate on a loan from the KfW Bank. But you should also look into the subsidy programs from the German federal government, the federal states, and the municipalities since these also offer rental real estate options.
Another point worth mentioning is that you can write off certain costs as a landlord, according to the German Income Tax Act. You can write off the interest on your loan as a business expense under "income from the letting and leasing of real estate" (Einkünfte aus Vermietung und Verpachtung). You can also deduct your reserve fund payments from your taxes, but not until the need for the repairs arises. The fact alone that you've already paid your reserve fund dues isn't enough.
The do's and don'ts of loan terms, fixed interest rates, and lock-in periods
Real estate loans are tailored specifically to the borrower and, as a result, can be pretty complex. The words and numbers that get thrown around are often challenging to understand at first.
When you're trying to figure out which loan arrangement will work best for you, don't just look at how much the monthly payment is. It's also important to know how long the loan term is, the underlying interest rate, and what amortization rate is being used.
Lower your interest rate by agreeing to a longer lock-in period (15+ years).
Set your amortization rate at 2-3%. This way, your remaining balance won't be too high at the end of the loan term.
Allow yourself a certain amount of flexibility with your repayment. Life can take unexpected turns, and so can your financial situation. Being able to adjust your amortization rate, or to make prepayments, can be very helpful.
Make use of your right to an extraordinary termination after ten years, as per Section 489(1)(1) of the German Civil Code, so that you can refinance and get better loan conditions.
Find out which subsidy programs you might qualify for and acquire additional "low-cost" financing.
Don't agree to an excessively long loan term or lock-in period. Banks charge an additional interest rate premium on long-term "low interest rate" lock-in periods.
Don't get a bullet loan, where you're only expected to pay the loan principal in one lump sum at the end of the loan term. It might sound tempting, but it will only result in a longer loan term and more interest.
Don't forget to compare offers. Even minor differences in interest rates can make a big difference when considering the total sum of the loan and the loan term.
Signing and concluding the agreement:
important things you should know
The pens are inked, the financials have been worked out, and all parties involved agree. Now all you have to do is put your name on the dotted line. Once both parties have signed, the property financing becomes an official reality. But there's no need to rush: even though you might want to have everything under wraps as quickly as possible, you should still take your time and re-read the agreement carefully. It's essential to make sure that you understand everything in the agreement, that it makes sense, and, first and foremost, that it reflects what you agreed to verbally.
The following items must be included in the loan agreement:
The amount being disbursed to you
The effective annual percentage rate (APR)
Additional fees associated with the lending of money
Securities that the bank will draw on in the event of default of payment (usually a mortgage registered in the land register)
Right of withdrawal (cancellation deadline: 2 weeks)
If the bank puts a deadline on the offer, you'll need to make sure that you have the agreement signed and returned to the bank no later than the specified date. Failing to meet the deadline is generally seen as being equivalent to rejecting the offer, and you will have to renegotiate with the bank to get a new one.
Getting your money disbursed and making your interest and amortization payments
Once the ink is dry, the cash can start flowing. Depending on whether you're buying an existing piece of real estate or a property that has yet to be built, you will have to pay the purchase price either in one lump sum or in installments as construction moves forward. Your notary will tell you what you have to pay and when, but only after they've made sure that certain requirements have been met, which can take several weeks in most cases. So, until you receive the go-ahead from the notary, the money stays where it is. When you finally get the notice of due payment in the mail, you can send an order of disbursement to the bank, usually by email.
If you're buying an existing piece of real estate, the loan sum usually is disbursed and paid all at once, and your monthly amortization payments begin immediately after that. When exactly your first payment is due – and all payments from then on – is written in your loan agreement.
If you are paying for the property in installments, the first payment will usually be due immediately in this case as well. Naturally, your monthly payments are lower when the loan sum is being disbursed in installments, and they will go up once construction has been completed and the entire sum has been paid. But until you have a tenant, you won't be generating any income through rent, and each payment will have to be made out of pocket.
Sometimes it doesn't work out how you wanted
Your property financing can fall through for a variety of different reasons.
Sometimes it's because your credit rating isn't good enough or because the property didn't pass the bank's inspection.
If you aren't a civil servant or don't have a permanent employment contract, that can be a deal-breaker for some banks. Another red flag is if your Schufa credit score is low or if you have a negative item on your Schufa credit report. If you are currently working reduced hours (Kurzarbeit) or employed in one of several specific industries (food service, retail, aviation, or similar), then the potential and risks of granting you a loan will also be considered more rigorously. Some banks will also look at your age, but this tends to apply to people over 60.
The other possibility is that the property you've selected doesn't pass the bank's checks. It could be because the rental income isn't consistent or because the reserve funds aren't sufficient.
So that's it — your dream of investing in real estate is over, right? Not necessarily! Since each lender has different criteria for property financing approval, it's always worth asking other banks. We can help with that. Just give us the green light, and we'll start collecting and sending you offers tailored to your specific circumstances.