Financing reservation purchase agreement house The Netherlands

Financing reservation purchase agreement house The Netherlands

Have you purchased a home with financing reservation and would like to know what it is? A financing reservation is an agreement between you as a buyer and the seller(s). It allows you as a buyer to cancel the purchase agreement free of charge if you do not get a mortgage. This is also called a resolutive condition.

It is wise when buying a house to have a financing condition included in the purchase agreement. Below we will further explain how a financing reservation works.

 

Example financing reservation

Most purchase agreements of houses in the Netherlands use the standard model purchase agreement that is regularly revised by the brokerage organizations such as the NVM, the Consumentenbond and Vereniging Eigen Huis.

This standard model includes the following:

Article 15 Resolutory conditions 15.1. This sales contract may be cancelled by the buyer if: a. the buyer does not, on or before ………………., receive a binding offer for a mortgage loan or a mortgage loan offer from a recognized credit institution to finance the immovable property for an amount of ……………., in words: ………….. , involving a gross annual mortgage payment of not more than ………….. in words: ……….., or at an interest rate of no more than ……. , with the following type of mortgage:……………………………………….. For the purposes of this article the term ‘banking institution’ shall mean a bank or insurance company as defined in Section 1:1 of the Dutch Financial Supervision Act (Wet op het financieel toezicht); or b. the buyer does not, on or before …………………, obtain a National Mortgage Guarantee (Nationale Hypotheek Garantie) corresponding with the mortgage loan applied for; or c. on ……………….. the report of a structural survey performed by ……… (name of surveyor) shows that the costs of the immediately required repair of defects and overdue maintenance exceed an amount of €…………., in words …………., or if an additional specialist survey is recommended. If the surveyor uses a bandwidth in the repair costs for parts of the report, the highest amount will be assumed. 15.2. Either party may cancel this sales contract if the seller is unable, pursuant to the Dutch Local Authorities (Compulsory Purchase) Act (Wet voorkeursrecht gemeenten), to transfer ownership of the immovable property at the agreed date. The seller is obliged, as soon as it is evident that the seller is unable, pursuant to the said Act, to meet his transfer obligation or to meet such obligation in time, to notify the buyer accordingly in writing. 15.3. The parties undertake to each other to make every reasonable effort to obtain the aforesaid permit and/or funding and/or National Mortgage Guarantee and/or commitment(s) and/or other items. The party invoking the right to cancel must ensure that the other party or the other party’s estate agent receives the notice of cancellation on or before the …… working day following the date referred to in the resolutive condition in question. Such notice must be adequately substantiated by documentation and be given in writing using a generally accepted means of communication. If the buyer wishes to invoke the right to cancel because of the inability to secure funding (in a timely manner) as referred to in clause a. of Article 15.1, the expression ‘adequately substantiated by documentation’ means that one rejection from a recognized credit institution must be submitted to the seller or the seller’s estate agent, except as otherwise agreed between the parties. In addition, / In derogation of this provision,* the parties agree that the buyer must submit the following document(s) to meet the requirement of ‘adequately substantiated by documentation’: …………………………………………If the buyer wishes to invoke the termination as a result of the structural survey as referred to in Article 15.1 under c, ‘well documented’ will be taken to mean that a copy of the survey report, which includes an overview of the costs for the necessary repair of defects and the overdue maintenance, is submitted to the seller or his estate agent. In that case, both parties shall be released from this sales contract. Any payments already made by the buyer shall then be refunded. Those holding the funds so paid are hereby obliged and, as far as necessary, irrevocably authorized to make such a refund.

Thus, this standard article specifies a date and amount to which the financing reservation applies. So the financing retention also has an end date. If you let this end date expire while there is still no approval for the mortgage application, you can no longer appeal to these resolutive conditions and you are bound by the purchase agreement. Simply put; if you are late, you will therefore face a 10% penalty.

Similarly, if you apply for a higher mortgage amount than that on which the financing reservation has been agreed, and you receive a rejection, you also cannot appeal to the financing reservation.

In short, while negotiating the purchase of your home, it is also wise to consider this issue.

Extending the financing reservation

If you cannot make it within the agreed period of the financing reservation, then what? You can ask the seller to postpone the deadline and extend it to a new date. What happens if you as buyer wish to extend the financing reservation? If you do not succeed within this period you can dissolve the purchase agreement free of charge with a rejection letter from a lender. If you do not respond after this deadline, the purchase is final. Even if you have not received a mortgage after this deadline, or even if you have received a rejection letter.

The seller is not obliged to cooperate with such a request. It is up to the seller to assess whether cooperation is wise or not. If you refuse to extend the financing reservation, there is a good chance that the buyer will submit a rejection letter and cancel the sale. Then you as the seller can put the property on the market again which may then have a blemish on it. Prospective buyers may wonder whether the property is technically sound, etc.

Suppose an extension is possible, it is advisable to put this in writing and ask for a confirmation with the new date of the financing reservation and the seller’s agreement. It is also wise to note that all other agreements from the purchase agreement remain in place and do not change. You can also immediately request an extension of the term of the bank guarantee by the same period.

The financing reservation is a so-called resolutive condition that can also apply to a building inspection or obtaining a certain zoning or environmental permit.

 

How often is it possible to extend the financing reservation?

In principle, indefinitely. At least, if the seller agrees to the request for extension. This should be agreed on a time-by-time basis. You cannot unilaterally enforce the extension of resolutive conditions.

Common practice is that a seller is usually at their limit after two requests. If you wish to extend for a third time, however, you should have a good and comprehensive motivation. You should also realize that much of the confidence in a good outcome has already evaporated.

There may be good reasons why additional time is needed. Only a seller will also want clarity at some point. If you do need extra time, we recommend asking for it in time. If you come up with this at the last minute, the sympathy of a salesperson disappears very quickly.

Would you like to receive a quick scan as a result of a rejected mortgage application? We can often help you quickly on your way.

 

What can be causes of a request for extension?

Despite the promotional advertisements from banks and other lenders, the road to getting a mortgage can be bumpy. For example, there are many parties involved in applying for a mortgage. Below is a list of the most common reasons when requesting an extension of the financing reservation :

  • The agreed period for the financing reservation is too tightly agreed upon, usually 5 to 6 weeks is the norm, but the selling party often wants faster and would prefer to agree on 4 weeks.
  • The cheapest mortgage providers are also often the “toughest” in accepting your mortgage application. They quietly ask for new information multiple times during the process and they have outsourced the underwriting process to third parties which means there is an extra link in the process and with that comes extra time and little direct contact with the handler. It was recently reported that for a regular mortgage application a lender requested 70 documents.
  • The staggered delivery of documents is counterproductive because most lenders do not review your mortgage application until all requested documents are provided.
  • If life insurance is required, underwriting may be delayed due to health screening because consultation with an attending physician is often required.
  • The current home for sale has not yet been sold or an appraisal of the home has not taken place.
  • The BKR statement shows there is still a debt that is causing a delay. This can also be an overdraft on your checking account.
  • For example, a divorce has not been fully processed due to the lack of registration with the municipality or the house is still in both of your names and you wish to buy a new home independently.
    You are an entrepreneur and the mortgage underwriter wishes to see more information about your business.

Preventing a request for postponement

It is quite possible to save time in the mortgage application process by discussing with a mortgage broker the possible bottlenecks in your application in a timely manner. Below are some suggestions :

Agree a realistic deadline with the seller and negotiate this if necessary. This is a common principle during the buying process. In many purchase contracts it is also agreed to submit the complete mortgage application in case of rejection. In our opinion, this goes very far since you provide a complete blueprint of your financial data in such a situation. This too is negotiable.
When talking to your mortgage advisor, try to already have as many documents ready as possible such as the employer’s statement, salary slip and other relevant documents. In case of inaccuracies in these documents, the mistake will already be noticed at this stage and a new document can be provided in time.
Know what your maximum mortgage is so that you make a realistic mortgage application.
When selecting the lender, try to ask as much as possible which additional documents should be requested. A skilled mortgage advisor can already predict which additional documents will be necessary and anticipate this.
If you have a special situation, discuss this with the lender beforehand so that it does not become an issue later in the underwriting process and, if necessary, substantiate this situation with a clear explanation.
Try to remove overdrafts from a checking account and deferred payment options from your credit card well before the mortgage application is submitted. If you have doubts about your BKR status, request a summary of your situation online from the BKR (for a fee) so that any details can already be discussed with your mortgage advisor.
Choose a mortgage advisor who thinks with you and also assertively monitors deadlines himself and avoids the need for delays. If you choose a mortgage advisor through our office, we will keep a finger on the pulse and, if desired, extend the financing reservation on your behalf. Banks also have emergency procedures, so with the right approach, your case will be dealt with on time. Ultimately, it is many times more pleasant not to have to ask for a delay for all parties involved in the process.

Need more information on this topic or wish to apply for your mortgage as a matter of urgency? Feel free to ask using the form below.

 

Compensate actual damages

Suppose in the worst case scenario you are faced with a rejection then you are still required to “take” the property. In practice, this means that you have to pay a 10% penalty and compensate the seller for the remaining damage. Many consumers think that it is only 10% that you have to pay, but this amount can increase if the actual damage caused by the seller is greater.

In summary, the expiration of the term of the financing reservation is an important date. The moment you have received a binding offer from the bank or lender, you can be sure that the financing is in place. Until then, therefore, you have no security.

 

Abuse of the financing reservation

We are regularly asked how to deal with the incorrect use of the financing reservation. Sellers apparently feel that some buyers want to get out of the sale because of a cooling housing market or can get a better deal on another property. Then, apparently, a rejection letter is presented that the seller does not wish to agree to. So what can you do as a seller?

The times when twenty or more bids came in for a home seem to be over for now. Therefore, it may happen that the next buyer makes a lower bid and there is a large difference between the earlier sale price. You could then sue the first buyer for these damages and demand 10% as agreed in the purchase agreement.

By the way, getting your right is different from being right. In order to achieve your goal, litigation is required. This takes time, money and energy. Some sellers do not need a potentially grueling process.

 

Bidding without financing reservations

In recent years, it has been almost necessary to bid on a home without a financing reservation. After all, the boiling dry housing market had more buyers than sellers making your bid more attractive by not including any resolutive conditions such as a financing reservation. Apart from making your offer more attractive, omitting a financing reservation can also be an option if you can fully meet the purchase price.

Do you only need a small mortgage in relation to the purchase price? That absolutely does not have to guarantee a successful outcome of the mortgage application. Unfortunately, we have enough practical experience to know that apparently the simplest mortgage applications can turn into complete horror applications. Often the time factor is then critical and if a financing condition is omitted, the entire risk lies with the buyer.

However, you can reduce the risk by discussing the potential risks with a mortgage broker in advance. We can even get you started with a bidding letter so that you may be able to make the offer with a financing reservation, but with a lower risk to the seller through our explanation of feasibility.

 

What amount of financing retention?

What is the right amount to include in the conditional purchase agreement? This can be a tricky question. For example, are you going to make major renovations to the home and do you want to include a renovation deposit or not? Suppose you are buying a dilapidated house where you have to chip away at a few tons, it may be wise to include the amount of the renovation in the financing reservation.

An example with calculation:

Calculation of financing reservation

Purchase price of house € 450,000

Rebuilding costs € 350,000

Surplus value or own money € 50,000

Appraised value after rebuilding
€ 695.000
Required financing € 750,000

In the above example, someone buys a house that needs to be renovated and to realize the renovation requires a mortgage of € 750,000. The maximum mortgage is 100% of the appraised value after renovation of € 695,000. In short, this buyer cannot finance the house with renovation. If this buyer includes too low a financing reservation, it is not possible to cancel the purchase agreement free of charge. A financing reservation of €750,000 is therefore necessary to be able to realize the house with renovation plans. For convenience, we have left the buyer’s costs out of the calculation.

The moment there is more own money, a lower financing reservation will suffice. Also, the probability of getting the mortgage is then higher. This is shown in the following example.

Calculation reservation of financing

Purchase price of house € 450,000

Renovation costs € 350,000

Surplus value or own money € 200,000

Appraised value after rebuilding
€ 695.000
Required financing € 600,000

In this calculation the required mortgage is lower than the appraised value after renovation. In the purchase agreement you can therefore take into account an amount of € 600,000.

Your mortgage advisor can calculate exactly what is a safe margin or amount to include as a financing condition so that it is attractive for the seller and safe for you.

 

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If you would like advice on taking out a mortgage or buying a house, we would love to hear from you. We can also offer you a free second opinion for your mortgage. An online introductory meeting can be set up with one of our mortgage consultants in no time!

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