finbird digital blog

Mortgages, loans and financing options


When buying real estate and financing a part of it, there are a few things to consider when looking at requirements of potential lenders. A bank, for example, wants to know as much as possible about your personal and financial situation, in order to correctly asses your individual risk profile.

A bank's risk evaluation can be classified into the following categories:

1) Factual creditworthiness

The factual credit score is all about numbers, that is, whether or not you can afford the property. The lender wants to know if you want to contribute equity to the financing. A rough estimate says that you should have at least 10-20% equity to attribute to your purchase.

But why 10-20%?

Banks do not like to take a high amount of risk and do not want to finance above the actual value of the investment. The more equity you can or want to bring in, the lower the risk for the bank, which the bank "rewards" with a lower interest rate. In addition to the equity capital, your income situation and its relation to your spending situation is equally important. Both positions are evaluated by a bank within the credit approval process. For applicants that are employed, proof of income is easier as the last three pay slips and possibly the December statement of the previous year are sufficient. For freelancers or self-employed applicants, a larger amount of documentation and verification needs to be done by a potential lender.

You need to show a potential lender that you can afford the monthly payment for a mortgage after deducting all costs. It should be taken into account that every bank includes a lump sum for the cost of living in the expenses and that each bank uses different estimates.

2) Personal creditworthiness

The check of personal creditworthiness is difficult to determine on the basis of numbers alone. This is why lenders look at your past handling of payment obligations through a credit agency, the Schufa. The score therefore ideally should to be clean. The goal is to make a good impression, so a lender trusts in your fulfilling your obligations.

3) Valuation

Your property should serve as security for your financing, so a lender needs to verify its sustainable value. To achieve this, there are standardized evaluation methods available. To derive a valuation the bank needs a list of documents. This is one of the larger challenge for most first-time buyers, as the documents are not centrally available but need to be obtained from different places. Documents include drawings, calculations, official registrations, pictures, etc.

4) Completeness of documents

Every bank wants to get an accurate picture of its customer. A missing document can delay the final decision of a lender, as they are obligated by law to document required information through relevant documents. You should ensure that your personal documents are available, complete and in order. Many documents can either be obtained from the real estate agent or directly from the current owner. The property type also determines relevant documents. A declaration of partition (Teilungserklärung) only applies to condominiums and not a house. If you want to build a house from scratch, you need to have a construction plan from an architect or a contractor.