L is for Loan Amount
A common mistake made by purchasers is to assume that the “loan amount” is the amount that will be available at settlement. For example, a purchaser is offered a loan of $300,000 and assumes that the whole $300,000 will be handed over by the lender at settlement. The way in which the loan and settlement process works is that the lender will deduct from the total loan proceeds, the amount required for stamp duty, titles office registration fees and any loan fees (and in some cases, lender’s mortgage insurance, if the loan amount is greater than 80% of the property valuation).
While this error is unlikely to be made it does happen as purchasers are ill advised by their finance broker or lender. Sometimes the purchaser is aware of these deductions but doesn’t take them all into account or is given the wrong information as to the specific amounts that will apply.
Another mistake is to assume that your lender has provided an unconditional loan of, say $300,000 whereas the lender has agreed to lend that amount but “subject to a valuation of the property being purchased”. In most instances, the lender’s valuation will match the purchaser price, but this is not always the case. If the valuation comes in at a figure lower than the purchase price, the lender will still proceed with the loan but the purchaser will need to contribute more funds at settlement-this will cause a problem if the purchaser does not have those extra funds.
Tip for Purchasers: Make sure your broker or lender itemises ALL costs and expenses so that you see exactly how much you have to contribute (in total) and when you have to contribute it. Have your solicitor review your loan and security documents before you sign them or, if you don’t have them do a pre-signing review, you must provide a full copy of these documents to your solicitor and ask for validation of your remaining contribution
Tip for Purchasers: Do not assume that your loan is unconditionally approved until a valuation of the property being purchased has been completed. Your final contribution will only be certain, once this has occurred.
M is for Mutual Settlements
In many cases, a purchaser is also a seller. A lifestyle choice results in the sale of a property and the purchase of another property. In these instances, simultaneous settlements are required. Funds from the sale are needed for the purchase and the property that is being purchased is needed for somewhere to live.
Given funds are needed from the sale transaction it will need to settle either earlier in the day or at exactly the same time as the purchase. The upshot of this is that if the sale fails to settle, funds will not be available for the purchase and, therefore, the purchase will also fail to settle. As has been stated before, most will want to settle on a Friday to get the move over and done on the weekend. Hence, a recipe for disaster!
Tip for Sellers and Purchasers: There is only one way to minimise this risk if you do not have ample funds or lines of credit with your lender to settle your purchase first. That is, communicate with your solicitor every step of the way. There can be no surprises, such as your current bank suddenly insisting that you have to not only pay out the loan over the property being sold but also pay out or reduce another line of credit that you have. Next, do whatever you can to avoid short settlement periods. If you do a simultaneous sale and purchase on, say, 30 days there is very little time to rectify issues that might arise during the conveyancing process.
N is for Nomination
When purchasing a property, it is always advisable to insert the term “and/or nominee” within the description of the purchaser in the Contract Particulars of Sale. While most standard form contracts of sale now have a general condition that allows nominations as of right, it is always safer to add these words.
The use of this term will enable the purchaser to add another purchaser(s) or replace the initial purchaser with an alternative purchaser(s) prior to settlement. This is useful if, for example, (a) a party that you wish to purchase the property with is not available to sign the contract at the time of signing, (b) you want to substitute a corporate entity as the purchaser; (c) your lender will not approve your loan based on the income of the party who signed and you need to bolster your capacity to get the required loan by adding another party.
Always remember, though, the contract of sale will provide that the initial purchaser remains fully liable for completion irrespective of the nomination.
Tips for purchasers: (1) always add the above mentioned words when signing a contract to purchase property; (2) obtain advise in relation to the special conditions within the Contract of Sale as they sometimes limit when you can nominate (eg a certain number of days prior to settlement) and also might impose costs that you have to pay the seller’s solicitor if you choose to nominate-a competent solicitor will seek to remove the cost elements through pre-signing negotiations.