Can You Get a Mortgage for an Auction Property?

Buying a property at auction is a great opportunity to score yourself a bargain. If you're looking for a “fixer-upper” and something to work on, an auction property could be the best choice for you. Auction properties are often more difficult to sell conventionally, but that means you can find some low prices at auction.

If that all sounds too good to be true, there is one issue that can make buying an auction property a little tricky. Securing financing for an auction property can be a little more challenging compared to going the conventional buying route.

However, not all hope is lost. It is possible to find the financing you need if you have your heart set on buying at auction. Read on to discover if you can get a mortgage on an auction property, along with the other financial options that could be available for you.

Can You Get a Mortgage on an Auction Property?

You might have heard otherwise, but it is possible to get a mortgage for an auction property. Unfortunately, it can be more difficult, with more restrictions and conditions to follow. But if you're thinking about buying an auction property, don't give up right away if you don't have the cash right now. You might be able to get a mortgage, or you can explore other ways to fund your potential purchase.

Auction Property Financing: Explained

Financing an auction property can be similar to the conventional buying process in many ways. If you want to buy with a mortgage, the first step is to get an agreement (or decision) in principle. This says that a lender may be willing to lend a certain amount to you, although it's not a guarantee that they will give you a mortgage.

Next, you will need to find a mortgageable property. This is always the case, but it's something that might be more challenging at auction. Many auction properties are being sold in that way largely because they are not mortgageable, which means finding one that is could be difficult.

Another thing to consider is that when you buy an auction property, the full amount must be paid within a certain amount of time. How much time you have will depend on whether the sale is conditional or unconditional.

For an unconditional sale, you'll be required to pay a 10% deposit on the day and then the remaining balance within 28 days. For a conditional sale, you have 56 days to pay, during which time the seller can't accept another offer. The exchange of contracts takes place in the first 28 days, along with paying a 10% deposit, and another 28 days is allowed for the completion of the sale.

This means that a conditional sale is likely to be the better option for anyone hoping to buy with a mortgage. A mortgage can take several weeks to arrange, and the longer period also gives you an opportunity to carry out surveys and other necessary checks. If your lender can't complete your mortgage application fast enough, there is also the option of taking out a bridging loan to cover the costs in the meantime.

How Does Buying a House at Auction Work?

An auction property will first be advertised online to generate interest from buyers. The seller will set a reserve price, and there may be a guide price or starting amount. The winner of the auction will be whoever bids the highest over the reserve price. They will then have to pay a deposit or reserve fee to secure the sale.

Some buyers will choose to purchase an auction property with a mortgage. But, of course, there are also buyers who are able to buy with cash.

Types of Auction Sales

Traditional and modern methods of auction are the two main types you will find when looking at properties. Traditional auctions (also known as conditional auctions) typically take place at an auction house, while modern auctions (or unconditional auctions) take place online.

Traditional or Unconditional Auction Sales

Traditional auction sales are often preferred by cash buyers and investors. They have a quicker time frame for purchase, with less flexibility. Bidders will arrive at the auction house on the right day and at the set time and will then wait for the property they're interested in to come up. They bid in person and, if they win, must pay a 10% deposit on the same day. If they back out of the purchase, they lose this deposit. There is then a 28-day period to pay the rest of the purchase price.

Modern or Conditional Auction Sales

The modern method of auction can offer more flexibility, making it a more appropriate choice for anyone buying with a mortgage. The auction takes place online for a longer period of time, which can be up to 30 days. During this time, buyers can put in their bids, making it not too dissimilar to making an offer as part of a conventional sale. The winner must then pay a reservation fee, which is generally about 5% of the total price. They then have 56 days to pay their deposit and complete the sale.

Understanding the Auction House Mortgage Application Process

Applying for a mortgage to buy an auction property isn't necessarily different from applying for any other mortgage. However, it's important to keep in mind that lenders won't agree to mortgage just any property. Any property you buy at auction must be mortgageable. Your lender will also want to know that you intend to use the mortgage to buy a property at auction.

Just like with any other property purchase using a mortgage, the first step is to get an agreement in principle (AIP), also called a decision in principle. This document from a bank or building society is an estimate of how much they would be willing to lend you. It's not a guarantee of a mortgage, but it is a good indication that you'll be able to secure one.

After you've got your decision in principle, you can start looking at properties. When there's a property you're interested in, do your research to settle on a reasonable price. Look at similar properties and past sales for an indication of what you should pay. Make sure you do your due diligence when it comes to looking at the legal pack (the auction house should give you one), and take some time to understand how the bidding process works.

When it's time to secure your mortgage, you can proceed with a full application. Your lender will want to complete a valuation to make sure you're paying the right price. They will want the property to be in a liveable condition, with a kitchen and bathroom.

Pros and Cons of Buying an Auction Property

Pros:

Potentially cheaper properties
The option to really make a house your own
You're less likely to be gazumped
It's a fast process
You still have the option of buying with a mortgage

Cons

Finding a mortgageable property can be harder
Bidding can be fierce
You have to pay quickly and it's hard to back out
The fast process can be emotional

Factors to Consider Before Applying for a Mortgage

Before you apply for a mortgage, it's important to think about a few things. First and foremost, you have to consider your finances. You'll have to pay a 10% deposit on an auction property. Additionally, lenders are likely to offer you a maximum of around 4.5x your annual income. Getting an AIP is a good idea if you want to know how much you'll be able to borrow.

You'll also need to think about what you can afford to repay on a mortgage over time. Not only that, but you'll need to consider the fact that mortgage rates could increase in the future.

How to Increase Your Chances of Mortgage Approval

If you want to ensure you're approved for a mortgage, getting your finances in order is a must. Take a good look at your credit report, and start clearing away any major debts. Get together a good deposit and perhaps even consider ways to increase your income. Review your spending and try to show that you're capable of good budgeting.

Finding the right lender is important too. Using a whole-of-market mortgage broker will help you find the right lender and best deal. This can be especially important if you have any special circumstances, such as being self-employed or having a low credit score.

Exploring Alternative Financing Options for Auction Properties

If using a mortgage to buy an auction property isn't right for you, there are alternatives. A bridging loan can help you while you're waiting to be approved for a mortgage. But if you're not using a mortgage at all, you might choose to pay in cash. This could come from an inheritance, savings, or cashing in on other investments.

Some people might consider alternative forms of funding. These can include real estate crowdfunding and peer-to-peer lending. A joint venture, involving partnering up with someone else, could also be an option.

Tips for Finding the Right Lender for Auction Property Mortgages

To find the right mortgage lender for an auction property, consider using a mortgage broker who specialises in mortgages for these properties. They should be familiar with the market and which lenders are most likely to approve your application. You can also find advice from lenders and brokers on how to find the right mortgage.

Get Legal Help from TBI

It's important to pay close attention to the legal details when buying a property at auction. Tilly Bailey & Irvine have a dedicated team of conveyancing solicitors to help with all property and conveyancing issues. We’re an award-winning legal firm, with decades of experience in helping home buyers take care of all the paperwork and legalities when it comes to mortgage completion.

Get in touch with us today at any of our Teesside branches:

We remove the stress, hassle and complications of the house-buying process, allowing you to focus on the house move itself. We look forward to chatting with you.