Buying a House at Auction with a Mortgage
Getting a mortgage for buying a house at auction works in the same way as if you were buying through the more traditional route. You will have to contact a mortgage provider, either in a branch or through a mortgage broker to let them know your situation. Your provider or broker will have dealt with a similar situation before, and will know how best to help you.
You should talk to your conveyancer (the lawyer handling your transaction) as they advise you on the process due to their in-depth experience of buying a house at auction. They can even do the bidding for you if needed. Their are also auction solicitors that have auction experience because special expertise is required. This Compare My Move guide will share everything you need to know about getting a mortgage for buying a house at auction.
Buying a House at Auction Timescale
Buying at auction with a mortgage means you need to be confident that you can obtain the full amount of finance by the end of the 28-day payment period following the auction.
Buying at auction is one of the fastest conveyancing processes. As soon as the gavel drops, 10% of the purchase price needs to be paid on the day. You will also need to show evidence that you will be able to pay the rest of the amount within 28 days. One of the main deterrents of buying at auction is the timescale you need to pay by.
If you fail to pay the full amount within 28 days of the auction, you will lose your deposit and could be liable to pay for the resale of the property.
You may also have to pay interest every day until the property is sold and might even have to pay the difference if the property finally sells for less than your initial bid. Your verified conveyancer will help you with the legal side of the purchase.
If you choose to use a type of auction like the sealed bidding process, then this timescale may differ as this results in a different process with other factors to consider before the sale is legally complete.
Mortgage in Principle for Auctions
Increasingly becoming one of the most popular options for buying a house, buying a house at auction will still require a mortgage if needed. You will need to apply for a mortgage in principle. Auction House, one of the biggest auction companies handling ‘real life’ and online auctions, claims that you can buy a house at auction with a mortgage only if the property is mortgageable without retentions.
A Mortgage in Principle is the certificate or statement from a lender to say they would be willing to lend you a certain amount of money in principle. The amount is based upon your financial background, including your credit score. It'll give you an accurate idea of how much mortgage you can afford.
All mortgage lenders provide a Mortgage in Principle (MIP), otherwise known as an Agreement in Principle or Decision in Principle. Having a MIP is not only vital for buying at auction, but it is also reassuring as a buyer to know how much you can theoretically afford.
You will need a MIP certificate or statement available on the day of the auction as proof that you will be able to afford your purchased property.
It is important to understand that a Mortgage in Principle is not a guaranteed amount. It is merely an indication of how much a buyer may be able to borrow, with the precise sum depending on the type and condition of the property concerned. Mortgage providers withhold the right to pull out of the lending process at any time under certain circumstances, potentially leaving you with a huge problem. This is especially the case if you are trying to buy a house with bad credit.
Lenders will likely pull out of an auction sale if the property you have purchased does not meet their criteria.
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Types of Property Sold at Auction
Most of the properties you'll find at auction will need some sort of development. That's why they are being sold at auction at a price that is typically lower than comparable types of property in better condition sell through traditional methods.
Common properties to be found at auction are:
- Repossessed and sold by a lender - These are homes that are seized by the lender when the owner failed to pay the mortgage.
- Those where the owner has died, and is sold by relatives or a lender - Properties where the owner has died often go to auction as the family may be in different locations and agree to a quick sale.
- Currently tenanted - This is more suited for a landlord with a buy-to-let mortgage. You won't be able to get a residential mortgage on a house with tenants in situ.
- Dilapidated - This is a house that needs extensive work and on which you may be unable to get a mortgage.
- Unmortgageable for some reason - This could be a home with an unusual problem such as subsidence or Japanese knotweed infestation or built with concrete which has decayed over time. An example of this would be PRC houses.
Some of these properties (typically the first three categories) will be acceptable to mortgage lenders; the latter two may not, and would require a buyer at action to be able to buy in cash or via loans secured elsewhere.
Potential Mortgage Problems at Auction
As the name suggests, you will obviously have trouble gaining a mortgage for unmortgageable properties. For example, lenders would be reluctant to lend on a flat with a very short leasehold, as its value would decline rapidly in a short period unless the lease was extended. Likewise, your mortgage will not be approved if your chosen property has unusual characteristics which may jeopardise its value in the long-term.
You will also not be able to borrow if the property you purchased has subsidence or if your property survey finds evidence of Japanese knotweed or other invasive plants.
Preparing for a Property Auction
Auctioneers typically release their property catalogues some four weeks before the day of the auction. In this time, you should start to prepare your mortgage, but also view properties that you are interested in.
To ensure you know exactly what you're working with when it comes to buying a house at auction, you should undertake this preparation:
- Do Your Research - Just the same as if you were buying a house in the traditional method, you need to carry out some research of the area you'd like to buy a house in. Visit the location and see what other properties are for sale locally at auction or via estate agents.
- Arrange Viewings - Once you've discovered the property of your choice in a good location, arrange to view it. Prepare a set of questions to ask the auctioneer’s representative who will show you around.
- Property Survey - If you are worried that the house will need too much work or you have a gut feeling, getting a property survey carried out will put your mind at ease. Once you've decided which survey you need, your surveyor will be able to highlight any structural damage.
- Apply for A Mortgage in Principle - If you are buying at auction with a mortgage, you will need to apply for a mortgage in principle in advance. This will give you proof that you're in the process whilst at the auction.
- Have Finances in Place - Make sure you have prepared for the cost of buying a house at auction. If you are the successful bidder you will need to pay 10% of the price on the day and the remaining 90% within 28 days of the auction. This means you will have to have your finances in place before bidding at the auction.
