Letter of Sanction - no Letter of Offer for new house build?

J

Jayjumper

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I'm currently in contract negotiations to buy a house being built by a small developer. The house will take 8 months to build. The bank (AIB) will not give us a Letter of Offer until the house is fully built, but will give us a Letter of Sanction. This Letter of Sanction is for 3 months, then can be extended again for 3 months automatically, but after that, the bank are telling me I have to REAPPLY for my mortgage! What if the banks rules change in between and we're after signing a contract and can't get a mortgage after 6 months? Does this not seem a little strange?
Because it's not a self build, the bank won't allow us to draw down the mortgage to avoid this uncertainty.
Do all other banks hold this position, or are people signing contracts without the certainty of a Letter of Offer?
 
You are correct. This is a risk. It also seems unusual, as the Bank take-out source for the build loan is presumably the subsequent long term mortgage. To some extent you are protected, as a decline of a long term mortgage would leave you with no immediate repayment option. I would write to the Bank outling this and your need to have a long term agreement in order to protect both your own and the Bank's investment in this property. It's certaintly a strange lending practise and may be due to 1 side of the Bank having a discretion to approve short term and the other side holding the discretion to approve longer term mortgages.
 
Hi 44brendan - I'm afraid I'm not quite following:
"as the Bank take-out source for the build loan is presumably the subsequent long term mortgage. To some extent you are protected, as a decline of a long term mortgage would leave you with no immediate repayment option."

If you mean that it's in the Banks benefit to giveus the mortgage? I've already had multiple discussions on this with the bank, and had my solicitor send them the house details, and our requirement to sign a contract in order to start the house build. I've gone to my mortgage lenders boss, and had her go to head office, still to no avail... our solicitor isn't happy with us signing the contract with just a Letter of Sanction that has to be renewed. The bank are saying that these new rules have come in over the last year. We both have good jobs with respectable salaries with no short term chance of losing our jobs - so it can't be a risk based assessment...
 
Yes, I am saying that it is to the benefit of both the Bank and yourselves that they subsequently approve a long term mortgage. However, your solicitor is quite correct with his/her advise. I.e. If you complete the property and the Bank refuse to extend a long term HL the Bank can call in the existing loan and this would result in all sorts of problems. As I said previously, as a lending Policy it makes no sense. However, the ultimate decision is up to you. There are only a few alternative lenders in the market and if you fail to obtain an approval from another institution your options are limited. Provided your financial position is sound, you may be in a good position to seek loan approval from another institution coming up to completion of the house, which would give you some flexibility.
 
AIB are odd in this respect. Assuming you qualify, other lenders will give you a formal loan offer for the full amount required, with conditions governing the drawing down in stage payments.
 
Ahh, issue is that there are no stage payments anymore - builder was explaining to me that because there were so many people staging payments as their builder went bankrupt, had a mortgage but no house, he stopped doing this. It's payment upon house built only. I'm going to apply to other lenders in the meantime (though AIB has the best rate) to have a backup
 
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