Buying property can be stressful at the best of times, let alone during a global pandemic. Whilst not necessarily a direct result of COVID-19, the reality is that banks have become much more cautious when it comes to lending. Pre-approvals for home loans is one area where banks are taking a much tougher stance. To help get through the process, here are some tips to help reduce pre-approval angst.
The first thing most people do when they’re thinking about buying a house is talk to their bank, particularly first-home buyers. Some established buyers may have the financial resources to buy a property without pre-approval but, for most of us, the first step onto the property ladder starts with finding out how much the bank is willing to lend us.
Say the bank gives an individual pre-approval up to $600,000. Some people automatically think ‘Great, we've got $600,000 to spend. Let's go buy a house!’
Many people don't realise the pre-approval is conditional; it's not a guarantee that bank finance will be available when they need it. They don't think to talk with a solicitor first and sometimes end up making an unconditional cash offer based on their $600,000 pre-approval. Once the bank gets involved, it will go over the deal with a fine-tooth comb to ensure that certain requirements are met.
For a start, the bank will want to see a copy of the Agreement for Sale and Purchase. They will also want to know of any encumbrances that may affect the bank’s interest and confirm that the property is insurable. They may also require a registered valuation. If it's an older property, they may require a building inspection to uncover any issues or significant maintenance that may be required in the near future. The property will be assessed thoroughly to decide if it's suitable security for any lending.
At the end of all that, the bank can still decide that the property doesn't meet their requirements and they can withdraw the offer of pre-approval. They may deem the property to be unsatisfactory security for the level of lending required.
Borrowers can be left in limbo when their bank pulls the plug on the pre-approval. We don't see it very often, but it's one of those things that people should be aware of.
The other thing banks consider is if your financial circumstances have changed from the time you are granted pre-approval and the time you need to draw down bank funds to complete the purchase. For example, your personal situation could have changed: you or your partner might have lost a stream of income. This is particularly relevant given the current COVID-19 situation and its impact on the economy. Even if you once qualified and could afford repayments on your home loan prior to COVID-19, your circumstances may be different now.
If your personal circumstances do change, you must let the bank know and they will reassess your pre-approval. You should be prepared for the bank asking you for written confirmation that you have not been impacted by COVID-19, verification of your income and confirmation that the deposit has not been reduced.
The other thing to be aware of is that most pre-approvals have a limited time frame of between three to six months, and the banks can change their minds at any time, especially at the moment, when there is so much uncertainty. Banks are ever more cautious.
If you purchase a house unconditionally and pay a deposit and then are not able to settle because you are unable to fund the purchase, then you could lose both the house and your deposit. You could also potentially be liable for making up the difference between the price the vendor sells the house for and your original offer, if the house is sold for less.
Finally, it is worth talking to a reputable mortgage broker who can negotiate with different banks to find you the best deal and advise you exactly where you stand regarding pre-approval.
If you have any questions, please contact us at Aspiring Law.