Many buyers are confused by the loan application process. The terms “loan pledge” and “loan application” all sound like the same thing. But they are in fact different stages of the mortgage application process. Buyers should go through each step in order.
Budget and cash contribution
The cash contribution is what gives a guideline for how much money buyers can afford to spend at home, given their financial situation. In Sweden you must today be able to pay at least 15% of the home’s purchase price yourself, the rest can be financed through mortgages.
This is called a cash bet. If you saved up 150,000, you can get a home loan for a maximum of 1,000,000, so you know the answer to the question “how big a loan promise can I get”, ie. your own budget for home loans. This will ensure that you are looking in the right price range, and is the first step in a loan pledge calculation.
The loan promise
After you have made a budget yourself, it is time to apply for a loan promise from a bank or other body. You can visit the bank or apply for a loan promise online. They look at the buyer’s credit rating and the likelihood that he will repay the loan. In today’s connected world, you can get a loan promise quickly.
The loan promise requires a credit check by a lender, and it is at this stage that you can get a preliminary report on your loan interest rate.
This step should be completed before placing a bid on a house. Bids from buyers with a loan pledge are stronger than bids from buyers who have not arranged this with the bank yet. The loan promise shows the seller that the buyer is serious and will probably be able to obtain financing to complete the transaction.
Again, sellers do not want to remove their house from the market unless they are quite sure that the transaction will be completed. Most brokers also do not allow bids from buyers who do not have a loan promise. Usually, your loan maturity period is not any length, but varies from bank to bank.
If you would like more information about the loan promise, read our article, What is the difference between loan promise and loan application?
The loan application
When the buyer’s offer on a home is accepted by the seller, the buyer can go ahead and make a loan application.
Once an application is received, the lender will review it and confirm its intention to provide financing for the purchase, as long as both the property and the buyer’s finances meet the lender’s criteria.
You will notice that, unlike the cash contribution and the loan promise, which only evaluates the buyer, the loan application provisions require an evaluation of both the buyer and their selected property.
In order to meet the buyer’s finances, the buyer must provide up-to-date documentation on their financial situation, source of income and creditworthiness.
In order to satisfy the condition that applies to the property, the property must be valued at the purchase price (or higher) and may need to be approved in a physical inspection.