It is important that a lender undertakes ‘due diligence’ before accepting an application for loan from a borrower seeking finance. Due diligence refers to checks about the authenticity of the buyer, his income, credit worthiness, etc.
Once the lender is satisfied that the borrower can repay the loan, he sets out the terms and conditions by which he is willing to lend. This is commonly referred to as mortgage offer in residential and simple commercial transactions. In complex commercial transactions it is referred to as ‘commitment letter’. Irrespective of the terminology used, it is important that the buyer’s conveyancing solicitor make sure that the buyer has received and accepted a mortgage offer before proceeding to advise on the conveyancing details regarding the transaction.
A mortgage offer includes one or all of the following matters:
a) Description of the property to be mortgaged, along with the price, tenure etc.
b) The amount of advance and the period of mortgage.
c) Would the mortgage include the repayment or is it interest only.
d) Is there an interest rate that is applicable to the loan.
e) The amount that the borrower is required to repay to the lender. This money will fluctuate if a variable interest rate is chosen.
f) If the lender is to insure the property, details about the cover including the period within which it will start. The conveyancing solicitor should check if the lender’s policy comes into force at the same time as the provisions in the insurance. The insurance amount is usually higher than the current price of the property to cover the cost of rebuilding the property if it is destroyed, or cost of repairs on the neighbouring property etc.
g) The lender can also ask repair works to be carried out on the property in order to agree to the loan and even mention the time limit within which these repairs are to be carried out. The lender can also hold back part payment of the loan until he is satisfied that the repair work has been undertaken to his satisfaction. Such retention would naturally create a shortfall in the money during completion. Thus, it is important to make sure that sufficient funds are available to complete the transaction and undertake repairs.
h) Sometimes, the lender may lend a higher amount than what he thinks is advisable. In such circumstances, the lender may insure his investment to protect himself against the prospect of the borrower defaulting on the mortgage. The single premium to be paid for such insurance is to be paid by the borrower, and is often included in the mortgage letter as a ‘guarantee premium’.
Another term commonly included in the mortgage letter is that an existing mortgage of a client should be discharged on or before completion of the new loan. The buyer’s conveyancing solicitor should make sure that his client is aware of this condition and can comply with it.
Photo courtesy: brewbooks
