The Finance Approval Minefield
OPINIONAnyone who has dealt with the banks for a home loan will tell you about their battle scars with pride. Simply securing finance approval can be a frustrating and baffling task. An anxious purchaser can be kept waiting for finance approval because the valuation has been delayed, the vendor has gone overseas, the valuation has been done but your documents are being processed, your broker is on leave, your call is important to us…
It is best to ensure that the finance condition in the contract allows ample time to secure finance approval, because the unexpected happens.
With the right information, the naive purchaser can arm themselves against the common mistakes people make when buying a home and securing finance.
finance pre-approval is not the same thing as unconditional approval
There is a big difference between pre-approval and unconditional approval. The former means that the bank is interested in seeing you again but needs more information to commit. The latter is a happy union that can continue on until settlement and beyond.
Pre-approval means that there are still bank requirements to be satisfied before your finance is unconditional, for example a satisfactory valuation of the property, proof of ID, or mortgage documents need to be returned and processed. These things are important, as any one of them can result in your finance being rejected.
Get in touch with your bank and find out what you need to do to make your finance unconditional.
when unconditional approval is not unconditional
You receive a letter from the bank saying that your finance is approved, the bank is locked in and you are ready to move towards settlement with confidence. But wait, this is not always the case.
A few wide-eyed purchasers have found that their unconditional approval was anything but. A careful reading of their approval letter found that under the bold type the letter continued on to say that their finance was “subject to further bank requirements”. The bank can still reject your finance if there are conditions to be met.
Click here for an example of this type of finance approval letter.
risky situations
There are properties that are notoriously difficult to finance.
The CBD studio apartment is one example. If the property is less than six squares, most banks will not give you finance because of the low capital growth involved. Some banks will finance the purchase but only if they don’t have to provide most of the purchase price. If you have savings and only need to borrow about 60% of the purchase you are in a much better position to get a loan.
Despite the promises of finance “pre-approval” many purchasers have been caught out. To their horror their “pre-approved” finance was rejected once the bank realised the small square footage of the property. This is when an experienced broker can help, one who is familiar with this tricky situation and the lenders that are likely to oblige.
The trick? During the sign-up process give your lender with a full copy of the contract. If they later decide to decline your finance, you can point to the fact that they had the contract from the start and if they failed to notice the details it is not your fault. It has helped some desperate purchasers to get a loan when they were locked into a contract for a studio apartment.
Another example is the serviced apartment, this is where the owner signs a long term contract with a managing company that furnishes the apartment and guarantees rental return for the length of the agreement. Different companies offer different packages, some dictate that the owner cannot occupy the apartment during the agreement – something some purchasers don’t know when they sign the contract.
Again, it is the low capital growth of these properties that is a barrier for most banks. However, if you can secure finance they can be a good investment – it depends on the property and the package on offer, you can get a good return on rent and a few nights accommodation in the property each year.
If you are shopping for real estate or thinking about it, you will find the following articles helpful;
- For tips on choosing a lender and a broker, and to find out how wrong things can go; Great Rate, With a Terrible Headache By Shannyn Hunter
- The details you include when you make an offer are crucial. You must protect yourself. The “Oh”, “Really?” and “I Wish I Had Known That!” of Making an Offer and Organising Finance By Shannyn Hunter
- Read the finance condition in the contract carefully. Non-Standard General Conditions By Peter Mericka
- Don’t let the agent word your finance condition. Estate Agent’s Finance Clause By Peter Mericka
- Banks can pass on costs to the other parties of a transaction. To find out about unnecessary bank requirements; Bully Banks Cost Battlers Millions By Peter Mericka
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