Do this to stop a house purchase falling through.

We’ve noticed a disturbing trend around town. Banks are declining loans – even though the purchaser has ‘pre-approval’ for finance.

This can be a complete dealbreaker for people who have invested time and money in coming to an agreement to buy a particular property. But if your bank says it won’t approve the loan then there’s not much you can do about it.

However, if you know the underlying reason for these loan declines, you may be able to front-foot the problem – and get your finance without any hassles.

Here’s the key:

Get a building report early in the process - and disclose all issues to the bank.

Banks need to know if there are potential problems with the property, such as rotting piles or hidden water damage. After all, they’re going to register a security over the property (i.e. a mortgage). So they need to ensure the security being offered is satisfactory and the property will be easily saleable in the future.

They will want to know that the property is insurable. In fact, they won’t advance the funds on settlement day unless they get your solicitor’s certificate to prove the property is covered, with the bank’s interests noted on the policy. This means the insurance company specifically notes that the bank has a mortgage over the property. In the event of a large claim on the property your bank would receive the payout to clear the mortgage, not you.

To encourage the bank to lend on a property that does have issues, you’ll need to satisfy them that you can fund any repairs. Maybe you’re borrowing $500,000 for the purchase, but you’re going to need another $200,000 to bring things up to scratch. The bank will want to know you have sufficient funds (or the ability to top up your loan without breaching the bank’s lending criteria).

If you need an Accredited Building Surveyor, start here.

It's not just the building, it’s the land.

Your pre-purchase report should note any issues with unstable land or flooding. Natural disasters such as floods, landslips and earthquakes have made all New Zealand lenders very aware that the value of a property can be wiped out overnight.

Once again, it is up to you to check any risks before you commit to buying – and to make sure the property can be insured.

If you’re buying in a body corporate, check for any unresolved issues.

The body corporate must tell you about any issues with the building or land. They do this via a pre-disclosure document. If an issue has been raised and minuted, then this will be noted in the pre-disclosure document you receive from the body corp administrator (and in the body corp minutes from their Annual General Meeting).

In practice, we find that banks are wary of lending in multi-unit properties where there’s the potential for disruptive repairs and a big bill. Even if the issue seems minor, such as an unstable retaining wall on the driveway, they may decline the loan.

Can you see a theme emerging? Banks hate uncertainty. The more evidence you can find to prove that the issues are either minor or resolved, the better chance you have of an approval.

So what can you do?

How to minimise your chances of having a home loan declined.

Get a detailed building report early in the process.
Disclose any risks to your insurer to check whether the property is insurable.
If remediation work is required, get firm quotes from reputable firms, including contingencies and time frames.

It may seem like a lot of due diligence – but it’s in your interest to get this information out in the open before you’re too committed. Remember that your ‘pre-approved’ finance simply means the bank is happy with your personal creditworthiness. It isn’t a blank cheque to buy any old property the bank thinks is risky.

On the bright side, you may find that the vendor agrees to sort out any issues at their own expense, so you can do a clean deal.

If you’re a vendor, front-footing problems is in your interest too.

I don’t know why more vendors don’t get reports and fix any issues before listing their homes. It can help them achieve a better market price and makes the property attractive to more buyers.

The bottom line is this: information is power. Banks already know this, which is why they will not close a deal with too many unknowns.

Whether you’re a purchaser or vendor, it’s in your interest to have this power, too.

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