What are the risks of not having an unconditionally approved loan from a bank when purchasing a property?
With the current and foreseeable uncertainty with respect to inflation and rising interest rates, buyers should exercise caution when signing a contract for the purchase of a property.
First Issue
The first issue you may face is that a bank loan’s pre-approval does not mean that your bank guarantees you the loan amount.
Pre-approvals are indications from your bank that you may be able to get the loan amount provided that you meet the conditions the bank sets out.
Therefore, pre-approvals should be relied upon as indication only, and not as guaranteed money.
Second Issue
The second issue is that banks do actual valuation of the land and/or property you intend to buy. It is after that valuation that the bank tells you the amount they are willing to lend you.
Valuations sometimes depend on the market performance. If there is a dip in the market, such as the dip the market in Australia is currently experiencing, expect that banks’ valuations will be less than what it would have been perhaps 6 or 12 months ago. Therefore, it is also reasonable to expect that the amount a bank is willing to loan you is less than what it would have been 6 or 12 months ago.
Third issue
If you rush through your purchase, and do not obtain unconditional loan approval, and, say, the loan amount is less than what you need to purchase. Firstly, now that you;be signed a contract it would be quite difficult to get out of it. This is called an “unconditionally binding contract”.
Your way out is to either make up for the price difference from your own pocket, or borrow from family and friends.
Alternatively, if the worst case scenario happens, you will:
- Lose the 10% deposit to the vendor;
- Be liable for legal action by the vendor for losses (for example, if the vendor cannot sell the property for the same price as it was sold to you);
- Alternatively, the vendor can force you to buy the property;
- Be liable for legal costs and marketing fees, amongst a list of other costs.
What you need to do instead
It would be better for you to:
- Ensure that you have unconditional loan approval before you enter into an unconditionally binding sale of land and property contract;
- Do your homework and calculate all the fees you may be paying (including legal costs, stamp duty etc);
- Be guided by professionals.
