As auctions become more and more popular for first-time buyers looking for an accessible and affordable way of getting on the property ladder, we thought it was time to clear up a misconception about financing a property being sold at auction.
Auction properties are not exclusively limited to cash buyers with the ability to make full outright purchases, as some people believe, but also those seeking financial assistance and qualifying for a mortgage. There are, however, some things to take into consideration when deciding on purchasing an auction property with a mortgage.
Due to the fast turnaround of the auction process, you will need to obtain a decision in principle, or ‘agreement in principle’, from a mortgage provider prior to the auction. This will help you determine how much you can borrow and what your budget is for bidding on auction properties. That amount will be determined by the lender after reviewing your income and ability to afford the loan. To ensure a smooth process, provide the lender with necessary financial documentation, which typically includes salary information, the last three months’ payslips, three months’ bank statements, valid photo identification, and proof of your current address.
Be aware of the time frame
In all cases, auction properties will have a fixed completion date, usually 20 working days / 4 weeks which means that you must be able to obtain finance within a specified time frame. If you fail to secure financing in time to complete your 10% deposit may be forfeit. Auction purchases typically require a quick closing, so you’ll need to work closely with your lender to expedite the mortgage approval and closing process. Traditional mortgage applications may take longer, so be prepared to provide all necessary documentation promptly.
There are requirements that must be met for a property to be approved of a mortgage and your lender will consider the property’s condition when approving your mortgage. For example, if a property is too small, no usable bathroom or kitchen, or isn’t habitable, it will be very difficult to secure a mortgage. Issues like dry rot or an invasive plant species like Japanese Knotweed will also prevent you from being granted a mortgage.
Survey / Valuation
Your lender will likely require an appraisal of the property to determine its value. If the appraisal value is significantly lower than your winning bid, it could affect your ability to secure a mortgage for the full amount. Best advice is to have the lender survey your intended purchase prior to bidding, that way you’ll be certain of obtaining finance if your bid is successful.
Unconditional auction sale
When a property is labelled as an unconditional sale, you’ll be required to pay a 10% deposit right away on the auction day. After that, you must settle the remaining balance within 20 days, unless there are different terms specified. If you don’t follow through, you could forfeit your deposit, be responsible for the full property cost, and even face the expenses associated with reselling the property in a future auction.
If you find that you still require a little extra time to secure your mortgage on an auction property, Network Auctions have an exclusive product, Rightbuyer, that allows for an extra 6 weeks before the exchange in contract, giving you more than enough time and the certainty that the sale will go through.
If you’re planning to buy an auction property using a mortgage, it’s essential to be thorough in your preparations. Make sure you have all the required funds and approvals lined up before you jump in. This will significantly boost your chances of successfully securing the property that’s caught your eye.