Caveat loans for a settlement shortfall

The purchase price is $1,500,000, the bank valuation came in at $1,400,000, and the lender's 80 per cent is now $1,120,000 instead of $1,200,000. Or the sale of your previous home settles two weeks after your purchase. Or the lender excluded a bonus from income at the last minute and cut the loan. In each case there is a gap of tens of thousands to hundreds of thousands of dollars that has to be found before the settlement date, or the vendor can charge penalty interest, issue a notice to complete and eventually rescind and keep the deposit.

A property you own with equity, whether that is the home you are selling, an investment property or the parent's property if they will offer it. A title search on that property. The contract of sale and the settlement statement for the purchase so the lender can see the shortfall and the date. The exit: the sale contract on the outgoing property, or the refinance plan. The loan is usually sized to the shortfall plus costs and runs for one to six months.

Where the exit is the sale of the previous home, the caveat loan is repaid from the sale proceeds at that settlement, and the term is however long the gap is. A one month gap on a $150,000 shortfall at 2 per cent a month plus fees might cost $10,000 to $12,000, which is usually far less than the penalty interest and the risk of losing a 10 per cent deposit. Where the exit is a refinance, the borrower has to be confident the refinance will succeed, because if it does not the caveat loan rolls into default rates.

The single biggest factor is how early the specialist is involved. A shortfall identified two weeks out can be funded calmly. One identified the day before settlement can still be funded, but the lender choice narrows to whoever can move that day, and the cost rises. Tell your broker or specialist the moment a valuation or approval comes back short.