When it comes to buying a home, it’s essential to have savings. However, even with savings, it’s often not possible to pay for the home in cash, so you’ll need to seek help from a bank or financial institution to cover the cost. This is commonly known as taking out a mortgage—a process that isn’t particularly complicated, but one that does require a clear understanding of several key concepts to avoid unpleasant surprises along the way.

In Spain, between January and October 2023, 38.9% of the homes purchased also required a mortgage. That is, 323,998 out of the 832,756 homes that changed hands. That’s why you might be considering buying a home with a mortgage in the near future. This comprehensive guide is for you, as in this article we’ll cover everything you need to know so you can finance this purchase without any surprises.

What does it mean to apply for a mortgage?

The RAE defines a mortgage as “a real right that encumbers tangible property, making it liable for the fulfillment of a monetary obligation.” In this case, a bank or financial institution lends a certain amount of money to a person interested in purchasing a home in exchange for a lien on that property. Thus, the borrower agrees to repay the debt with the corresponding interest according to the stipulated terms, while retaining the right to occupy the home.

When the debt is paid off, the borrower automatically acquires ownership of the home; however, if the debt remains unpaid, the entity that issued the lien (the lender) may claim the property. Therefore, a mortgage loan involves:

• It involves making a significant financial commitment for the future, since the borrower agrees to repay the money borrowed and, in addition, to do so with interest at a previously agreed-upon rate.
• Taking on a debt that is generally long-term. It is customary to pay it off over a period of 20 to 30 years, which makes the monthly payments affordable for buyers who do not have significant financial resources.

What do you need to do before applying for a mortgage?

As we’ve just seen, applying for a mortgage is an important decision, and it’s a good idea to carefully consider all the steps involved before making it. That’s why it’s advisable to have a clear understanding of several things before going to the bank to apply for one.

Find out about the features of the home we want to buy

At first glance, we like a home and are interested in buying it. But is it really ideal and a good fit for what we’re looking for? In addition to visiting it more than once, it’s essential to talk to the real estate agent handling the sale or the owner about everything related to the property:

• Ask why the property is being sold and get specific details about its features: whether it’s new construction or pre-owned, its total square footage, whether it has a parking space and/or garage, its homeowners’ association fees, any unique features of the neighborhood, transportation links to the rest of the town where it’s located, whether all basic services are nearby, whether the basic utilities (electricity, water, or gas) are already connected, etc.
• Check for any debts: Is the price you’ll actually pay the same as the listed sale price, or does the purchase involve taking on other financial obligations? Asking the agent or the owner is an easy way to quickly clarify this issue, although it’s also advisable to request the property’s abstract from the Land Registry, since this document is easy to obtain and provides all the information about the property and any associated debts, such as other mortgages, liens, tax debts, or foreclosures.
• Your energy performance certificate: As of June 1, 2013, the energy performance certificate has been a mandatory document in Spain in order to rent or sell a property. This document indicates the property’s energy consumption, so you should ask if one is already available and, if not, begin the process of obtaining it before proceeding with the transaction.

Confirm that we have enough money for the down payment plus the mortgage payment

It’s also important to know that buying a home with a mortgage requires paying a significant portion of its value up front. As a general rule, mortgages cover a maximum of 80% of the home’s cost, so the remaining 20% must be paid in cash as a down payment when you sign the contract. And that’s not all, because you’ll also need to set aside another 10–15% of the home’s value to cover all the taxes and fees associated with the transaction. So keep in mind that, at a minimum, you’ll need to have about one-third of the total cost of the home available up front.

Sign the earnest money contract

Once you’re sure you want to buy that home you like so much, it’s a good idea to reserve it before applying for a mortgage. How? By signing a contract with the seller a deposit agreement—that is, a document that establishes a commitment between both parties to complete the sale at a later date.

Under this agreement, the prospective buyer pays a sum of money as a deposit, which will later be deducted from the final price, to ensure that the seller does not sell the property to someone else. Thus, if either party fails to comply, they may be penalized in accordance with the terms of this agreement.

Key Mortgage Concepts

Having a good faith deposit agreement will give you some peace of mind so you can secure the best mortgage for your needs, since it’s typically valid for 6 months from the date it’s signed. Therefore, the next step is to do your research and visit different banks or financial institutions to review their mortgage offers and evaluate their terms.

To help you do this the best way possible, here are some valuable tips for buying a home with a mortgage.

Committees

These are the extraordinary expenses or costs associated with certain mortgage-related procedures, such as simply taking out the mortgage. In this case, we’re referring to the origination fee, so you’ll need to ask the lender if they include it in your case, as well as whether they’ll charge you other fees for other types of transactions, such as, for example, early repayment of the loan (if you want to pay it off ahead of schedule).

Mortgage Interest

Keep in mind that, in the long run, the lender will recoup all the money it lends you and, in addition, will make a clear profit in the process. Therefore, the interest on a mortgage is the extra amount of money you’ll be charged for buying a home with a mortgage.

In this article, you can learn all about mortgage interest rates and the different types. But, to summarize, there are three types of mortgages based on these rates:

• Fixed-rate: The bank sets the interest rate when the mortgage is taken out and commits to keeping it fixed for the duration of the loan. Therefore, the customer knows from day one the monthly payment they will make and how long they will have to make those payments. This provides greater peace of mind and stability, although, in exchange, it means taking on a higher monthly mortgage payment than with a variable-rate mortgage.
• Variable-rate: The interest rate is a composite rate, meaning it consists of a fixed spread and a benchmark index. The latter determines how the mortgage payment will change over time, since it is linked to an external benchmark index. In Spain, the most commonly used benchmark is the Euribor, an interest rate applied to euro-denominated loans issued by major banks. It is published daily, and depending on its fluctuations, it will cause the mortgage payment to rise or fall after a rate adjustment (which occurs every six months or once a year, depending on the lender).
• Hybrid-rate mortgage: As the name suggests, it combines both fixed and variable rates. Typically, the borrower agrees to pay a fixed rate for an initial, relatively short period (two or three years), after which the terms switch to a variable rate. This is a particularly attractive option if the customer wants greater peace of mind at the beginning and is willing to take on more risk in the medium and long term.

Mortgage repayment period

This is the maximum period of time during which the mortgage borrower agrees to repay the loan, including all interest. Typically, this period is a maximum of 30 years, although it is negotiated with the lender based on the applicant’s age and personal circumstances, particularly their financial capacity. In this regard, it’s important to keep in mind that the longer the term, the lower the monthly payments and the higher the interest—and vice versa: if you want to pay less interest, it’s best to pay off the entire debt as soon as possible.

It’s also worth noting that it is possible to make early payments on your mortgage—that is, to pay an amount (all or part) in advance to reduce or eliminate this debt. This can either decrease the amount of the remaining payments without changing the repayment term, or shorten the repayment term so that the loan is paid off sooner, while keeping the payment amounts the same.

Keep in mind that if you choose to pay off your mortgage early, the bank or financial institution may charge you a fee for doing so.

Changes to the Mortgage

Buying a home with a mortgage does not mean signing a binding agreement. There are different ways to change some of its terms, as long as you comply with current regulations and pay the corresponding fee:

• Mortgage Novation: It is possible to renegotiate aspects such as the interest rate, principal, mortgage term, fees, or the named borrower. This process involves additional costs, as it must be carried out before a notary and also requires registration with the relevant authorities.
• Mortgage Subrogation: Even if you’ve already signed a mortgage with a bank or financial institution, you should know that you can request to switch to another lender that offers terms you consider better for you. To do so, simply contact the new bank to have them assess the feasibility of the switch, and if they approve your request, they’ll handle the process. In this article, you’ll find all the information you need on this topic.

Bridge Mortgage

If you currently have a property with a mortgage but are looking to move and buy another home with a mortgage, there is an option available to you. It’s called a bridge loan—a loan that allows you to take out a new mortgage to purchase another home while you put your current one up for sale.

Therefore, it is designed for short periods of time, during which you pay only the interest (there is a grace period on principal payments) so that you can sell your current home and move into the new one. This way, once you receive the proceeds from the sale of your first home, you can pay off your initial mortgage and focus on paying off the second one. This will give you the flexibility and stability you need to make the change you feel is necessary.

Purchasing Insurance

The lender providing your mortgage may offer you one or more insurance policies. The most common are fire or comprehensive insurance, life insurance, and payment or loan protection insurance. Keep in mind that only the first is required to obtain the loan, although accepting others may entitle you to certain benefits on the terms offered to you, such as a reduction in your monthly payment.

Documents Required to Buy a Home with a Mortgage

Finally, don’t forget that the lender will verify in advance that you are able to take on the debt and repay it in the future. So don’t be surprised by the large amount of documentation they may ask you to provide:

• General documentation: National ID number (DNI) or Tax ID number (NIF) to verify your identity; recent bank statements to prove you have income from employment; an up-to-date employment history; deeds for any other properties you may own; last year’s income tax return; a CIRBE credit report to confirm that you have no other outstanding debts or loans; etc.
• Documents if you are employed: your employment contract, your last three pay stubs, proof of additional income (if applicable), and statements for any loans you may have.
• Documents required if you are self-employed: the previous year’s annual VAT return, proof of quarterly VAT payments for the current year, your annual or installment personal income tax return, and your most recent Social Security payment receipts.

In addition, they will likely conduct a financial feasibility assessment based on this documentation and information. Depending on your age, your employment, personal, and financial situation, the value of the home you want to buy, and the terms of the mortgage, they will determine your debt-to-income ratio. In other words, they will determine what percentage of your income you must allocate to your mortgage payment and ensure that this percentage does not exceed 30–35% so as not to jeopardize your financial stability.

At CULMIA, we help you buy a home with a mortgage

Once you’ve decided on the best mortgage for you and taken out the loan, you’ll be ready to take the final and most important step: signing the deed for your new home before a notary. We hope this comprehensive guide will be very helpful as you work toward buying the home of your dreams.

And if you’d like more information to help you make the right choice when taking out the loan you need, feel free to download our free“Guide to Financing Your New Home.” In it, you’ll find these and many other tips to ensure that the financial aspect isn’t a problem for you.

We recommend:

• Mortgages in 2024: A Complete Guide.
• Real Estate Market Forecasts for 2024.