House Doctor: 'I'm buying a house at auction – but how do I make sure I get mortgage approval?'

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The Independent Online

Question: We're first-time buyers attending our third property auction next month, having previously lost out on price by £12,000 – on a £135,000 property – and a vendor changing his mind on the day. This time, with a mortgage in principle and 10 per cent deposit needed, we're ready to take on all-comers, but if we win, how do we know our lendor will actually give us mortgage approval for the agreed sale price? Also do we have to insure the property straight away, or is it still the responsibility of the owner?

Andy Pearman, Tavistock

Answer: I hope it's third time lucky for your hopes of a home under a hammer when it falls next month. Yet your preparations still have some way to go – and you need to remain cautious.

While auctions remain a popular way to buy a home on the cheap, the economic climate and fears of a double-dip recession mean that most mainstream lenders are extremely wary of either borrowers or a property deemed "higher risk" than normal.

Homes sold at auction are by no means necessarily the latter, but many banks and building societies have adopted extremely cautious views of auction property values. So while you might willingly bid £120,000 for a rundown two-bedroom house with potential, they may value it at no more than £95,000.

This isn't a problem if you know well in advance what your lender is happy with – allowing you to rearrange or restructure your finances accordingly. But, if you're successful at your auction, you'll only have 28 days – the accepted auction time frame – from your bid to sort your home loan.

While you may well have a mortgage in principle, it's a mortgage approval you really need if you want to be in with a better chance of getting your hands on a home, says David Hollingworth at the broker London & Country. "A home loan in principle simply shows that the lender believes you're creditworthy – it has nothing to do with any actual property," he says. "You need to call your lender and request a formal mortgage application as soon as you can, which will let your lender carry out a valuation on the property itself."

I know of one bidder with a mortgage in principle who won the auction with £95,000 for a fire-damaged property needing extensive renovation. Two weeks later, as her mortgage application went through, her lender put its value at only £80,000. Unable to find the extra cash in time, she lost the property – and her £9,500 deposit.

With a property auction, a binding legal contract is formed the minute you win. So if you're successful, the house will instantly become your insurable risk, so have an insurer lined up on the telephone to insure you for buildings cover.