Summary Highlights: The main thing to know is that the process is lengthy, often lasting many months, and requires diligence and trust between the buyer and seller, particularly since the mortgage funds will not be released to the seller until after the title is transferred to the buyer and the bank annotates the title. Selling a property can be an intricate process, especially when the buyer plans to finance the purchase through a bank mortgage. Understanding the steps involved can help ensure a smooth transaction for both parties. This blog post will outline the essential steps, provide valuable tips for sellers and buyers. Due to the complexity of these transactions, feel free to call/message us on WhatsApp at +63-917-106-8136 or email us at contact@hhresco.com so we can walk you through the process.
With that said, here are the detailed steps:
Step 1: Initial Agreement and Documentation
1.1 Buyer-Seller Agreement The process begins with the buyer and seller agreeing on the terms of the sale with a Contract to Sell (CTS). This includes the purchase price, payment terms, and any contingencies. In most cases, the buyer makes an earnest money payment to secure the property. This fee is typically non-refundable but is deducted from the down payment.
Step 2: Buyer’s Mortgage Application
2.1 Choose a Bank
The buyer selects a bank to apply for a mortgage. It's advisable to compare different banks' interest rates, loan terms, and processing fees.
2.2 Submit Requirements
The seller provides documents to the buyer, who then submits those documents along with their own required documents to the bank, including:
- Contract to Sell - Notarized in the Philippines or Apostilled if the clients are overseas. The copy submitted must be an original with wet signatures.
- Legible Copy of Property Title
- Tax Declarations for the Condo, Land, and Building, if applicable. A tax declaration is an official document issued by a local government authority, typically the municipal or city assessor's office, that provides details about a specific property for taxation purposes. It includes information about the property's assessed value, which is used to calculate property taxes. Providing tax declarations to the bank is crucial when obtaining a mortgage as it verifies property ownership and details, ensures up-to-date tax payments, and assists in accurate property valuation. It helps the bank assess the loan amount, manage risks, and comply with legal requirements.
- Most recent/current tax receipts for property taxes. Providing current tax receipts is essential for verifying that all property taxes are paid up to date, ensuring a clear title free from tax liens, and facilitating smooth real estate transactions. These receipts are often required by lenders during mortgage applications to assess risk and confirm the property’s financial standing.
- Real Estate Tax Clearance from the city/municipality where the property is located. A real estate tax clearance is a document or certification issued by a government tax authority confirming that all property taxes on a specific piece of real estate have been paid up to date. This clearance is often required in real estate transactions to ensure that there are no outstanding tax liabilities on the property.
- Completed loan application form
- Valid IDs & Tax ID Number (TIN#) for buyers and sellers
- Income documents (e.g., income tax return, pay slips, Certificate of Employment)
- Bank statements
- Appraisal fee
2.3 Property Appraisal
The bank will conduct an appraisal to determine the property's market value. This is crucial as it affects the loan amount the bank is willing to approve. The standard mortgage that the bank funds is typically the lower of 80% of the property sale or appraised value.
2.4 Loan Approval
Once the appraisal and all documents are submitted, the bank will review the application. Approval times can vary, but it's typically within 3-6 weeks. Upon loan approval, the bank shall issue a Letter of Guarantee (LOG) in favor of the seller. This letter will confirm the bank's commitment to release the loan funds to the seller. It's important to note that these loan funds do not get released to the seller until after the title is transferred to the buyer and the bank is able to annotate the title with the mortgage.
Important for buyers/borrowers: Each bank will assess its own loan fees, typically between 1-3% of the loan.
2.5 Down Payment
Once a LOG is issued, the buyer completes the down payment of the remaining balance that is not funded by the loan as outlined in the LOG, less any earnest money. That amount is typically 20% of the value of the property. If the appraisal value is below the sale price, then the proceeds that are not covered by the bank loan need to be paid by the buyer at this time.
Step 3: Sale Preparation and Due Diligence
3.1 Complete Due Diligence
Both parties should conduct due diligence to ensure there are no legal impediments or encumbrances on the property. This includes verifying the title and checking for any unpaid taxes or liens, and if the property is within a subdivision or condominium, securing a management certificate from the property management or subdivision administration office.
3.2 Draft the Deed of Absolute Sale
Once the loan is approved, the seller prepares the Deed of Absolute Sale (DOAS). This document officially transfers ownership from the seller to the buyer. At the same time, the seller signs an acknowledgment receipt acknowledging receipt of the LOG from the bank indicating the bank’s commitment to release the loan funds upon the successful transfer and annotation of the title, and that a final acknowledgment receipt will be signed later upon receipt of the full payment from the bank.
3.3 Sign and Notarize the DOAS
The DOAS must be signed by both parties and notarized by a notary public.
Step 4: Payment and Transfer of Title
4.1 Payment of Capital Gains Tax and Documentary Stamp Tax to BIR
Depending on what was agreed upon by the parties, either the buyer or seller is responsible for paying the Capital Gains Tax (6% of the selling price or zonal value, whichever is higher) and the Documentary Stamp Tax (1.5% of the selling price).
4.2 Issuance of Certificate Authorizing Registration (CAR)
After taxes are paid, the BIR issues a CAR, which is needed to transfer the title.
4.3 Payment of the Local Transfer Tax to the City/Municipality
The local transfer tax is 0.5-0.75% of the higher of the purchase price or zonal value and is paid to the City or Municipality’s Treasurer's Office.
4.4 Transfer Title to Buyer & Payment of Land Registration Fees with Registry of Deeds
The seller submits the CAR, DOAS, and other required documents to the Registry of Deeds to transfer the title to the buyer's name. In Cebu and Lapu-Lapu, this process can take from 1 month to several months. Upon successful transfer and registration of the title of the property to the buyer, the seller shall provide the bank with a copy of the updated title, reflecting the buyer as the new owner. The bank will then return to the registry of deeds to annotate the mortgage lien on the title, which may take a few days to a few weeks.
4.5 Mortgage Release and Payment to Seller After the mortgage lien is annotated on the title, the bank will release the loan funds directly to the seller, as outlined in the Letter of Guarantee. It's incredibly important to note that this is a key thing to understand for both the buyer and seller. The bank will not release the funds to the seller until after the title is transferred to the buyer and the mortgage lien is annotated.
Step 5: Post-Sale Activities
5.1 Update Tax Declaration
The Tax Declaration is updated with the local Assessor's Office to reflect the new ownership.
Tips for Sellers:
- Be Organized: Keep all necessary documents readily available to avoid delays.
- Transparent Communication: Maintain open and clear communication with the buyer and bank.
- Hire a Professional: Consider hiring a real estate broker or lawyer to assist with the transaction.
- Prepare Financially: Ensure you have enough funds for the down payment, appraisal fee, and other related expenses.
- Understand Your Loan Terms: Fully understand the mortgage terms, interest rates, and repayment schedule.
- Inspect the Property: Conduct a thorough inspection of the property before finalizing the purchase.
Last Updated on July 25, 2024