Keep lender in loop when selling
IF you are about sell there is an important thing to remember that many overlook - there is another party who has a legal interest in the sale.
IF you are about sell there is an important thing to remember that many overlook - if you have a mortgage, there is another party who has a legal interest in the sale and a "charge" on the property.
This means that if, for whatever reason, the lender is not happy with the sale of the property, they have a complete legal right to halt proceedings.
Please don't panic.
The lender will not stop the sale if settlement is booked for a Wednesday 12.30pm and the branch closes for lunch, or because the buyers are choosing another bank.
The very rare occasion a bank or lender will ask questions is when they consider they are being forced into a high-risk situation financially.
Banks do not like this.
You as a seller have an obligation to keep the bank informed of substantial changes in your personal circumstances.
Selling the house upon which the loan is secured is considered to be one of those very situations.
And if you are not careful, it can become extremely stressful.
This issue came up recently because I've been helping a family who own their own home (mortgaged) and have a second property, which ironically was bought as an investment to make money.
This is not an uncommon profile for many Australians -- one family home, one investment property and one lender covering both.
Lenders generally like to keep their exposure to risk at a minimum and commonly prefer at least 20 per cent equity in the properties overall.
I will use these figures as an example of their case.
There are two properties: the family home of $700,000 plus the investment property $300,000.
In a typical case, the maximum mortgage the bank would be comfortable with would be $800,000 and $200,000 of equity would need to exist across both properties.
Often, however, the lender does not mind if the investment property has a full $300,000 loan providing the loan on the main home is no more that $500,000.
This all works beautifully, of course, provided that the values of the properties are retained and/or increase over time.
As long as you maintain the mortgage payments, even if values do drop the lender will not be immediately concerned.
They will be concerned, however, if you come to sell, or if you can no longer maintain the payments.
When that happens they will deny you access to further advances -- unless they come with huge costs -- and expect a tough new lending criteria.
And this is exactly what happened to this family I've been helping.
What has occurred is the main family home now needs to be sold due to the fact the family can no longer afford the mortgage each month.
This has been caused by losing the family's main regular income.
Being sensible, they decided to sell before the situation got worse.
They acknowledged the downturn in their local market and the fact it was a new home built in the boom times.
At the time, they thought they'd live there as a family forever and, without intention, over capitalised.
The combination of the overspend, the home only being a few years old and a declining market from the boom, plus the speed in which they needed to sell meant they accepted an offer of about $525,000.
They were, of course, devastated by this low amount however knew it was enough to pay off the loan on this home ($500,000).
The buyer in the meantime was delighted with their acquisition -- nothing like buying from a desperate seller. They had the property inspected, mortgages applied for, perhaps sold their own home or gave notice to landlords and presumed they were moving.
But somehow in this scenario, the bank has been finally notified of the pending sale and guess what?
They are exercising their right to stop the sale.
Why? Because if the sale proceeds at this level, after approximate disposal costs of say about $15,000, the main home loan will be paid out leaving the second property with a loan of the full 100 per cent loan.
In this case, the balance of the sale will be only $10,000 which does not even equate to 5 per cent.
The term of the loan states an 80 per cent loan to value, not 100 per cent.
From the bank's point of view, the new scenario requires a very different kind of loan, involving massive lenders mortgage insurance -- if you can even get it.
And in this case, the main wage earner has lost his job so it is not likely.
Right now, we have a buyer who is about to hear they cannot buy, and a seller who cannot sell and cannot afford their loan. Whose fault is it?
Legally, it is the poor, already distressed, and stressed, seller.
I have no happy ending for this case yet.
But before you get all angry with banks, you do have to remember you have a clear and obvious obligation to keep the other party you share ownership of your home with fully informed.
I hope the lender and seller will sit down and sort this out.
Meanwhile the poor buyer ... well, they could sue, of course, but would you bother?
There are no winners here at all.
But a simple call and perhaps a face-to-face meeting with the lender prior to selling and signing the sales contract could have avoided all this.
The outcome may have still been tough, but it would not have been this trial of potential financial devastation and disappointment for the sellers trying to start over and the buyers not getting their dream home purchase.
So a cautionary tale: "keep your lender in the loop to avoid ending up in the poop".
Andrew Winter is the host of Lifestyle Channel's Selling Houses Australia.