Looking for a home often starts cautiously. Many people follow housing listings without a precise timetable, until a home comes along that feels right in terms of location, layout and price.
At that point, the buyer’s situation can change quickly. Before making an offer, you need to know how much of a mortgage loan the bank may grant and whether the available collateral is sufficient for the planned purchase. A loan promise or preliminary loan approval helps outline these limits before the decision to buy a home becomes current.
In the housing market, buyers may have time to compare alternatives, but a good home can still require a quick decision. The seller and the real estate agent may also assess the credibility of an offer based on whether the buyer’s financing has already been clarified.
In practice, financing does not only mean estimating the loan amount. It is also useful for the buyer to understand what kind of collateral the bank requires and on what terms an offer can be made if the final decision on the home is still pending.
A loan promise or preliminary loan approval does not solve everything
A loan promise or preliminary loan approval is the bank’s estimate of how large a mortgage loan the applicant may receive based on income, expenses, savings and the overall financial situation. Depending on the bank and the situation, it may be a binding decision or a preliminary estimate that is specified once the home to be purchased and any renovation needs are known.
A loan promise or preliminary loan approval does not oblige you to buy a home or draw down the loan. Its significance is practical: it tells you in what price range it is realistic to look for homes and when making an offer is feasible.
Why should you discuss the down payment and standard compensation with the bank in advance?
The terms related to the binding nature of a purchase offer may only come up once you have already found a home. For this reason, it is advisable to discuss the down payment, standard compensation and collateral with the bank before submitting an offer.
When a purchase offer is accepted, either a down payment or standard compensation, meaning pre-agreed compensation, is usually used:
- A down payment is an agreed amount paid by the buyer, usually as part of the purchase price, when the purchase offer is accepted.
- With standard compensation, the purchase offer includes a compensation amount agreed in advance, which may become payable if the transaction is cancelled without an acceptable reason stated in the offer.
Both are intended to strengthen the binding nature of the purchase offer, but in practice one of the alternatives is usually chosen. In housing share transactions, standard compensation recorded in the purchase offer is often a practical alternative to a down payment, but practices may vary depending on the home, the real estate agent and the situation.
It is worth clarifying with the bank in advance which approach is used in the situation, how any down payment will be arranged and what terms should be included in the offer if the final loan decision or collateral arrangement is still pending.
Once these matters have been clarified before submitting an offer, the buyer will have a better understanding of what kind of home they can make a credible offer on and what still needs to be specified with the bank. Often the next question concerns collateral: is the home to be purchased sufficient as collateral for the loan, or is another collateral solution needed alongside it?
Why is repayment capacity not enough on its own for a loan decision?
In a mortgage loan, the bank assesses both repayment capacity and collateral. The home being purchased usually serves as the primary collateral for the loan, but its collateral value typically does not cover the entire loan amount. If you do not have enough personal savings, another solution is needed for the missing part.
This situation may arise, for example, for a first-time buyer who has regular income and, in the bank’s assessment, sufficient repayment capacity, but not enough savings to cover the collateral shortfall. In this case, paid additional collateral applied for through the bank, such as Garantia’s mortgage guarantee, may be one option alongside other collateral solutions.
Another option is to use a family member’s property as additional collateral for the loan. Third-party collateral may solve the collateral shortfall, but it usually also requires the situation of the guarantor or pledgor to be reviewed and may extend the decision-making process.
- Third-party collateral often requires additional checks: For example, property manager’s certificates, mortgage deeds, valuations and interbank clarifications may increase costs and affect the timetable.
- Garantia’s one-off fee mortgage guarantee is one option: It can be used to supplement the collateral in accordance with the bank’s credit decision without pledging a family member’s property. The guarantee is applied for through Garantia’s partner bank as part of the mortgage loan process.
| How can a collateral shortfall be solved? When the bank assesses a mortgage loan, the home being purchased usually does not cover the entire loan amount as collateral. A solution is needed for the missing part, which may be personal savings, other assets or a mortgage guarantee. | What does the solution mean in practice? | When can the solution be suitable? |
| Personal savings | The buyer uses personal savings to cover the part of the loan for which the bank requires additional collateral. | Suitable when there are enough savings and they do not need to be kept for other purposes, such as building wealth, renovation or as a financial buffer. |
| Third-party collateral, such as a parent’s home | A family member’s property, such as a parent’s home, is used as additional collateral for the loan. | May be suitable if a family member is willing to use their property as collateral for the loan and the required checks can be completed in time. |
| Garantia’s mortgage guarantee | A one-off fee mortgage guarantee applied for through the bank. It can be used to supplement the collateral for the loan. | May be suitable if repayment capacity is sufficient, but there are not enough personal savings or other additional collateral, or the buyer does not want to tie them to the purchase. |
When should you bring up Garantia at the bank?
It is advisable to bring up the mortgage guarantee already when applying for a loan promise or preliminary loan approval, as the bank assesses both the buyer’s repayment capacity and the required collateral at the same time. If you do not want to use personal savings or other additional collateral for the entire collateral need, you should book a loan consultation at Garantia’s partner bank. This way, Garantia’s mortgage guarantee can be taken into account as one alternative when planning the financing.
How can you make a purchase offer safely and in a controlled way?
When a suitable home is found and the main outlines of the financing are clear, the buyer should pay attention in particular to the following points:
- Use a financing condition if necessary: If the bank’s final home-specific approval is still pending, it is advisable to include a financing condition in the purchase offer. In practice, this means that completion of the transaction is tied to the buyer obtaining financing from the bank for the home in question by the agreed deadline. The exact wording of the condition should be confirmed with the bank or the real estate agent before submitting the offer.
- Prepare for a down payment or standard compensation: When a purchase offer is accepted, either a down payment or standard compensation is usually used. Discuss with the bank already when applying for a loan promise or binding loan offer which option suits your situation and how it affects the financing.
- Review the documents concerning the home carefully: For a housing share, important documents include the property manager’s certificate, financial statements and information on upcoming renovations. For a detached house, attention should be paid, among other things, to the condition of the building, completed repairs, any condition surveys and property details.
If you are planning to buy a home, it is worth discussing the collateral solution with the bank already in connection with the loan promise or preliminary loan approval. At the same time, you can find out whether Garantia’s mortgage guarantee could supplement the collateral in your situation. When the financing limits are known in advance, finding a suitable home will not be delayed by last-minute clarifications.
Frequently asked questions about the mortgage guarantee
Can Garantia’s guarantee help if I do not have enough personal savings?
It can supplement the collateral in a situation where the bank assesses the applicant’s repayment capacity to be sufficient, but additional collateral is needed for the loan.Do I apply for the mortgage guarantee directly from Garantia?
No. Garantia’s mortgage guarantee is applied for through a partner bank as part of the mortgage loan process.Can a mortgage guarantee replace collateral provided by parents?
In many situations, it can be an alternative to pledging a family member’s property. The final solution depends on the bank’s credit decision and the customer’s situation.When should the mortgage guarantee be brought up?
As early as possible, preferably already when applying for a loan promise or preliminary loan approval. This way, the collateral solution can be taken into account in good time before submitting a purchase offer.Can Garantia’s mortgage guarantee help you buy a home faster?
It may speed up the clarification of the collateral solution, because the additional checks related to pledging a family member’s property are not needed. The final timetable, however, depends on the bank’s credit decision and the home to be purchased.
You can ask one of Garantia’s partner banks for further information about the suitability of Garantia’s mortgage guarantee for your situation in connection with your loan consultation.
Read also: If you are considering how to choose your dream home and get the financing in place, read more in the asuntolainatakaus.fi blog “Can you get a mortgage loan without your own savings?”
Author
Ville Korte
Sales and Marketing Director
Garantia
The author has over 20 years of experience in mortgage financing at Garantia and in the banking sector.