When receiving any loan pre-approval, one of the criteria mentioned by all banks is that the property being offered as security is acceptable to the bank in relation to the type and location of the property. But what exactly does that mean and how can it affect your loan approval or purchase plans?
It is important to remember when going through the process of buying a new home, that even if you have been approved at a certain purchase level and even if you fit within the bank’s criteria in every other way, there is still a chance that your loan application could be turned down because they don’t like the property you are buying. We have had several occasions recently when clients have passed all the lender’s requirements only to be told that the property that they are planning on buying is unsuitable.
But what kind of things make a property unsuitable? The first thing could be the value of the property. Some lenders place themselves in a certain market where they don’t wish to take on borrowers with smaller loan requirements and for that reason may require that any property offered as collateral has a minimum value (Usually around $120,000). This will obviously count out some properties in a few of our local towns, which brings us to reason number two. There are many lenders who have decided that for those purchasing in smaller centres, a larger percentage of deposit will be required. One recent example was a bank who pre-approved a client for a purchase of $200,000 with a 10% deposit of $20,000, only to advise that they required a 35% deposit because he was purchasing a property in Kawerau. We have had similar occurrences in Edgecumbe and Opotiki as well as rural residential properties. The reason given by the banks is that in a smaller town the housing market is quieter, which would mean that it would be harder to sell the property in a mortgagee sale situation or if the borrower needed to sell the property due to hardship, but it may also be that the bank has had significant losses in a certain area which makes it unwilling to advance further loans as they are perceived by the lender to be a higher risk.
The next reason that the bank may not accept the security property at the level required comes down to the type of property being offered. Banks prefer to lend against existing homes ideally owner-occupied. They will obviously lend on other properties as well, but once again may often change the level of deposit required. Lending on apartments becomes a little harder, once again due to a limited re-sale potential, but they will also often discriminate against lifestyle properties, commercial properties, bare land (Meaning that a greater amount of deposit or equity is required if wishing to build on a section) and in recent times, may place extra restrictions on certain types of construction due to the problems with leaky homes, and homes used for the manufacture or use of “P”. It is a good idea to pass the details of any potential property that you are considering buying to your home loan adviser so that they may get an undertaking from the bank that the property is going to be accepted, especially if you will need to spend money on Registered Valuations or other inspections prior to the contract going unconditional.
The final thing that I’ll mention as a possible reason for a bank not accepting a property as security is the condition of the home. It may be that you’ve found a bargain property in need of some TLC, but if there is too much work required to get the property up to a liveable condition the bank may refuse to advance funds. This is because the bank won’t be in a position to do the work themselves if you decide not to complete the renovation or make the loan repayments. Consequently they may wish to see sufficient funds available for the work to be done or enough equity that they could sell the home in its current condition. In one very special example recently, a bank advised that they’d checked out a property being offered as security, only to discover that there was a tree growing through the roof! Unsurprisingly, they declined to offer the requested funds on that occasion! Make sure that your Home Loan adviser can help you find out what type of properties or limitations banks may impose, to avoid disappointment before you fall in love with your next dream home.
