Should you bother getting pre-approval and how do you pay the deposit if you're lucky enough to win at auction?
Here we answer these common questions and walk you through the financials of buying at auction.
Don't assume pre-approvals are full proof
Lenders also look to the property valuation as a guide to whether your purchase provides adequate security.
Financial pre-approvals (also called conditional or Approval in Principle) are a valuable price guide for indicating how much you can afford to spend but they are not a binding commitment from the lender.
As soon as you place the auction deposit, you need to get back in touch with a lender to start the process for a formal or full loan approval. It's at this step in the process that you're applying for funds to purchase a specific property at a particular loan amount.
The good news is that having pre-approval in place should speed up the time it takes to achieve formal approval. The bad news: there is still a chance the lender will reject your application.
At formal approval stage, there is a more rigorous and thorough assessment of your finances, and you must be able to satisfy the lender that you meet all their required conditions. Some lenders, for example, may only assess your stated income at pre-approval yet at formal approval they will conduct a thorough credit assessment that looks into your employment, debts, liabilities and assets.
There will be consideration given to whether your financial situation has altered since pre-approval. A change in jobs or reduction in working hours may be seen to affect your borrowing capacity, which in turn impacts the loan amount you would qualify for.
Making multiple pre-approval enquiries with different lenders is a sure way to make a lender nervous and provide possible grounds for loan rejection.
Lenders also look to the property valuation as a guide to whether your purchase provides adequate security. Loan applications may be declined if your property is perceived as over-priced or the lender has reached the limit of their exposure on your building or development.
Fortunately, when you work with a Yellow Brick Road mortgage broker, we can advise you which lenders have credit policies that offer you the best chance of loan approval. Your local professional representative will steer you towards lenders that provide reliable pre-approvals and loan suitability criteria suited to your circumstances.
Is your deposit ready?
If you're the successful bidder at an auction, you must be ready and willing to pay a deposit on the spot. Typically, you'll be up for 10% of the purchase price but check the contract of sale.
There is no cooling-off period in an auction as there is with a private sale. The seller and buyer are legally obliged to exchange contracts and complete the purchase. Backing out will see you lose your deposit and you may be held liable for any losses the vendor incurs re-auctioning the property.
Check in advance how to pay the deposit as this will depend on the terms and conditions set by the seller or real estate agent. Bank transfers or cheques are conventional methods of payment so bring your chequebook or ensure you have a large enough balance in your transaction or savings account.
Another payment option may be bank cheque, but this brings with it the danger of a shortfall of funds. As the cheque total is written up before the auction, it may not be enough should you buy the property for more than you expected.
If you're purchasing a property off-the-plan, you may have the option to pay with a deposit bond (a form of insurance policy that guarantees the payment of the deposit at settlement).
Remember, on top of the deposit you will need to set aside funds to finance many other upfront costs, including stamp duty, insurance, legal fees and building inspections.