10% vs 6 months & pre-approvals vs approvals

I had been doing some research.

The areas that I was looking to buy a land to build a house seems to be pretty high in demand. So, we are asked to put a refundable $1000 initial deposit to take the block off the market, and then sign the contract with an initial deposit of 10% of the value of the land after two weeks. 10%! These lands seem to get titled in more than 6 months time, some in 2018!!!!

It's crazy!

And I am confused.

1. Do we need to have the loan approved by the time we sign that agreement for the land? I feel that is the case, because the pre-approval does not necessarily mean the loan gets approved as far as the internet is concerned. Or is it just that the borrowable amount could be lower than what the pre-approved amount? (say you asked for 400K, and you got it pre-approved, but eventually the loan got approved for only 375K for whatever reason.) I feel that we should always ask for 10% more than what need.

2. I heard from my friend that a loan usually has a 3 to 6 month effective period. If that is true, by the time the land gets titled, the loan is rendered ineffective. What the heck! What are the chances that a loan which was once approved, does not get approved again without any changes to living circumstances? Can it happen? If it can, that's just so unfair. How can someone get a loan in a situation like this? Are we expected to risk our money like that?

3. And he also said we shouldn't put too many loan applications because it can eventually get your applications rejected. Is there a truth in that? Some of the brokers I spoke to cannot give me a realistic figure (doesn't have to be accurate, but say +/-10% off figure) without putting through a pre-approval. I feel that those brokers are no good because if they are going with a pre-approval without giving me a figure, they have chosen a bank which doesn't suit us but them.

4. I believe we need a conveyancer to go through the particulars of the contract before signing, right? I don't have one yet. At what stage do I need one?

I feel there are so many things that can get us a burnt hole in the pocket by trying to own a home.

 

Hi Mate,

It sounds like you need someone to use as a sounding board who can answer your questions, if you are going through a broker they should be able to answer all these questions for you.

Traditional process it.
1. Get pre-approval
2. Sign loan documents
3. Valuation (not possible here as there is currently nothing to value)
4. Unconditional approval

Yes that's correct, until the land is subdivided there is literally no asset that can be used to secure the loan. All you really have is a right to purchase a block that may or may not exist in the future.

If nothing in your situation changes and the bank's policy remains the same then you should be approved again. Are you stretching yourself to service the loan? If you have a clear buffer of additional income left over then it's much more likely to be approved again in a few months than if you are borrowing every dollar possible.

Go to creditsavvy.com.au or getcreditscore.com.au and find out your credit score, if it's high it should not pose too much of an issue. You still don't want to be applying to five banks in a few months regardless. Even if you do destroy you credit score applying to fifteen different lenders, you can approach a lender that does not use credit scoring if you have an explanation (I had one client that applied to 12 banks in three weeks, and we still got her loan approved).

A broker should be able to give you a preliminary figure prior to submitting an application, but it's important you don't make decisions based on the figure and wait for the pre-approval. I can calculate borrowing power for a client, but if they forget to tell me about a car loan and a credit card default, the figure I quote them will not be correct. At the end of the day the bank has access to more data than the broker.

Ideally, you would want a conveyancer/solicitor to review the contract and provide advice prior to signing anything binding.

Hope that helps mate, if you have any other questions please let me know.

 

Sometimes getting touch with brokers is difficult. And I would always appreciate others' input.

So, in my case, how do they approve the loan without having anything to value? Do they look at the value of similar properties and their massive database of past knowledge?

Does the bank evaluate the plan of the house as well?

So how does one make up the mind to go ahead with such a commitment? People aren't too bothered?

In reality, servicing the loan is nothing. The total repayments are only slightly higher than what we are paying as rent as per my broker's view. And we are still saving $2000 a month with my single "modest" income.

I got a score of 557. How can I even get a credit score when I have never applied for a loan? Probably it is just giving me a default figure because there is no information about me there?

It was similar when I was looking to rent a place after moving to Australia. No renting history meant that we get less priority as tenants. But in that case, there is the bond, which is refundable. If we do something wrong, the bond will protect the landlord. If the landlord does something wrong, we can complain to the authorities. But if we do not settle the land, they can go to courts. If the bank doesn't approve the loan which they pre-approved, we don't have any remedy. Or is there? Is that what the conditional nature of the contract means?

And why should applying for multiple preapprovals affect the score if we are just applying for preapprovals? I am not arguing, just want to understand. I mean, you would want to get preapprovals from few banks and go for the best one, isn't it? (Or is that why we need a good broker who can estimate very accurately how much we would be able to borrow from which bank?) Just because there are multiple applications, one would not (be able to) get all of them approved at the same time! Or is it because it (like everything) incurs them a cost, but we normally don't pay for it at that point, so they want to make it less appealing?

I understand. Preapproval is needed.

I will talk to my broker to see if he can hook me up with one, if we go ahead with the preapproval.

The only thing I am concerned about the preapproval is that out of our current savings of 45K, about 14K came from a lump sum payment of Japan Pension office (as I worked there for 5 years) and the last tax return (as I wasn't here for the full tax year). So, the bank might think our savings aren't genuine, although the money is in a savings account at the moment which if withdrawn will lose all the interest for the month and the other 31K has been gradual savings.

Should we wait for a couple of months to make it look genuine. It is of course genuine but the bank needs convincing.

Yes it did help me understand a few things.

So realistically, if you get preapproved for say $350000 loan and if we have $50000 to put into the house, what sort of maximum amount to spend on the land and house should we settling for? Should we keep it to around 375K just to be safe? Price of the land is something we don't have control over unless we are very lucky to find a well priced one, but we can always go with less options on the house and make some upgrades later.

 

Are you saying your broker does not return email/calls?

They won't approve the loan till they have something to value, which by the sound of things will happen when the subdivision has been approved.

The risk if you buy for X, the valuation comes in lower than X and you have to commit a higher amount of savings to settle on the land.

You have lots of option, you have this, a traditional house and land package, buy a vacnat block and build yourself, buy an existing home etc. It's really you decision on what you think will be best for you.

You may be able to easily make the repayments at 3.8%, but the banks will calculate repayments at 7.1%-8%, so you servicing may be much lower than you expect.

You should not need to apply for multiple pre-approvals, if the broker has done their homework and you have given them all your information then the first on will be approved. I have done hundreds of loans and never had one declined. If there is a potential issue the broker should run it past the bank's credit team and get their sign off in writing that it's okay.

Get you broker to run the situation past the credit team of the bank they are looking to apply to and get it approved/declined in writing.

Talk to you broker about this one, this is what they should be telling you. Don't forget you will need the ability to service and the equity (deposit) for not just the land purchase, but also the construction. There is no point buying a block of land to build on if you can't afford to ever build!

 

Thank you for the help @Simon Moore. Appreciate it.

There was a gap of few days for an email reply. But I suppose he simply lost it in all the emails he got. But I got the replies later. So probably that was a one off thing. Difficult to call from work, so I use email mostly.

I tried reaching another to get his opinion. He said he would call me back later every time. Never got back to me.

Another one said without getting the pre-approval, they cannot estimate accurately. I suppose those brokers are no good! Even I could have done that...I suppose.

The thing is, this is the first time I am dealing with one and I don't have a benchmark. Either my expectations are different, being living in Japan for 5 years with their punctuality. My friend told me that everyone take up to 48 hours to get back to you.

Also, the brokers who are good and busy (because everyone wants to reach them) and people who are not busy and not good.

OK, I suppose there is nothing I can do here.

Understood. So I will try to keep a buffer about....how much do you reckon? 25K?

I wanted to go for a house and land package, but it can be a bit expensive. And we have a tight budget which means we will have to go for a smaller land (250-300sqm) with a H&L package which can also affect the valuation result by the bank. I;m trying to go for a 350sqm land at the least.

Yes I understand.

I did a rough calculation without factoring in it being a IO loan until the house is built. I would have to pay $2053 @8% on a 330K loan. At current rates of about 4%, it is about $1500.

Alright.

I did give him all the information initially, but I did not know and he did not mention that I had to have my savings in the accounts for 3 months to call them genuine. So, probably I should wait.

Without genuine savings, I can only go for like 270K loan which is useless. With genuine, we might be able to go for 330K.

Easiest thing would be to wait another couple of months before going with a pre-approval, because then we would have the 45K+ in the savings account for whole 3 months without touching. But if the outcome in 3 months would be similar to the outcome today, then there is no point waiting, because we would lose out on good blocks.

Alright. I would not do anything without a written document anyway.

True. But wouldn't the money we have cover it? At the worst case I believe the deposits would be 10% for the land and 10% for the builder, so about 37500. And the builder's 10% is not required for many months anyway. The builder I have talked to would do it with 5% deposit anyway.

 

Different business models, Aussie, Mortgage Choice type brokers want to get you in, onto a fixed rate and off their desk as soon as possible. Other brokers want to build a relationship where you see them as part of your 'team' to grow you wealth.

How much risk are you willing to take on? If the valuation comes in under do you have other options, like a loan from a parent, that you would have access to. Without knowing the situation I can't really comment.

But can you even service the debt? It sounds like you don't know at the moment.

 

OK, that's fine. I prefer the latter after all.

I can borrow like 30K more if needed, but there is the complication of bringing that money into Australia.

Servicing the loan means repaying it, or something else?

If it is repaying, from who's point of view? From my point of view, it is not a problem. From the bank's, I don't know.

 

What you actually want is an excellent broker who is busy but makes it seem like they're not.

 

Or someone that acknowledges receipt of your emails / texts / phone calls by saying "got your emails / texts / phone call and will get back to you".

If they are not even acknowledging your communication and/or not getting back to you then use someone who does.

All of your questions should be answered by your current broker so get a new one if they arent but be upfront, loyal and also respond to their emails / texts / phone call in the same manner as it goes both ways

 

Fair enough.

My current broker is good enough. Just wanted to see other options as well, because that's what everyone recommends. Ones who were recommended to me by my colleagues and friends were hopeless.

Understood.

 

Servicing the loan is essentially your borrowing power - how much the banks will lend you.

 

That's what I don't know. My broker says we should be able to go for 330K. That gives us about 375K to play with which is enough.

I talked to him and he said he will run the numbers again and see.

The issue is, even if I get the pre-approval, we'll have to apply for the loan again as the lands get titled in 6 months or more in the areas where I was looking at. If I only had to put $1000 deposit, it would have been OK. But 10% of deposit is so no small feat. What if I do not get it approved again? I'll have to trust the judgement of my broker there and save up as much as I can until the settlement. If we save up at our very best, we would be able to go save up another 20K by that time (I was looking at a block and it gets titled in mid next year - so 9 months). Then we'll only have to borrow 310K.

If things go bad, I suppose I can ask for some money from parents, but that's the last resort.

In my broker's opinion, there is no point going with the pre-approval this soon.

Does a preapproval count as a credit request as well? Surely lenders should know about this situation which I believe is arisen as a result of extreme demands close to Berwick area.

 

Often in this scenario, assuming your circumstances are very straight forward I would write a letter confirming that you can service the loan. This is usually enough for the selling agent. It doesn't need to be a full approval, and there's no credit hit this way.

 

So - let me get this straight.

You have a budget of about $400,000 for a house and land?
You want to borrow $350,000?
But you can only borrow $330,000
10% is "no small feat"

The land deposit may be 10% and the builders deposit may be 10% which puts you at a 90% loan minimum (plus LMI).
How will you pay stamp duty (if applicable) and purchase costs?

If you enter into the contract to buy the land, which doesnt settle for 6+ months you are effectivly signing a cash offer. That being, if for any reason, you cant get a loan - you still need to pay for the property. There is no 'out'.

$375k is a fairly modest budget for house and land. Though this depends on where you are looking. Have you spoken to any builders about the cost of building?

There seems to be a lot more risk to this transaction than what it first appears.

Blacky

 

Some of the figures aren't accurate. I was looking at 375K max for a house and land package. 330K was the max that my broker estimated we could borrow when he ran the numbers. But when I explained my situation where the actual purchase is well into the future, he estimated 305K as a conservative figure. Which means we are 30K short.

Stamp duty and purchase cost would be covered by the FHOG, right?

The issue is that the preapproval means nothing in my situation because it will be ineffective after 3 months.

Yes. There is too much risk. My broker recommended to save up more and try to increase family income.

Or the other option is to settle for a 350K package which are hard to come by but not impossible to find. Or even go for an established house.

 

This is very common and most of the time the land would be late. Most builder would ask 5% after contract signing.

Are you looking at specifically fixed price H&L package? Just make sure everything is final price.

If you are looking at buying land and then look for a builder, best is to get quote from the builder on approximate build price. Site cost, BAL rating, upgrades, electrical choices - all can throw your budget under the water.

Also consider buffer in occasion of low val - mine was valued 40K and 17K less by 2 banks.

 

Personally I think a h&l package, or vacant block with build, in your situation is very risky.

The risk lies largely in the delay between purchase and settlement. The loan will remain subject to valuation, it wouldnt take much for this to drop between now and settlement and therefore you would need to fund the shortfall yourself.

An established house would be a safe/better option in my opinion

Blacky

 

I have started looking at those options as well. Let's see if I find a good one.

 

You can get a h&l fully approved now, if you can get a building contract together with the land contract for the banks valuer. It's a push getting this organised within 2 weeks but it's possible. Ask the land agent for more time and less deposit. Many agents will accept less than a 10% deposit especially in areas designed for first home owners.