The legal process of contracting a Spanish Mortgage
Contracting of a loan. Spain has different legal processes to other countries. Whilst many similarities apply, the legal requirements in Spain reflect Spanish Law. As a Non residents buyer you may not know these laws. It is therefore ideal to understand the application process for a Mortgage in Spain.
June 2019 saw European wide practices adopted. This package ensured all EU based Banks adhered to specific sets of guidelines. Most importantly relating to the information given prior to, and on signing of a home loan. There remains differences between countries, in terms of product conditions and securitisation. contact us
The Spanish Mortgage Process
Application process for for a mortgage in Spain. Gaining a financial approval
Applications for Spanish mortgages generally reflect the application process of most countries. The Spanish Banks require documentary evidence from the applicant. Firstly, confirming who they are. Secondly their fiscal situation in terms of income and debts. Thirdly source of deposits. Only official documents are acceptable.
Each Bank in Spain has its own level of requirements. The Bank of Spain moreover will have agreed these. The lender must undertake due diligence. It is a key requirement that loan affordability is verified. Lenders will look to see that outgoings on regular debt payments, don’t exceed their specified ratio. This calculation also includes new payment in Spain. Affordability ratios do vary from Bank to Bank. Debt payments should not normally exceed 35% of your net incomes. To clarify, Spanish Banks work on net incomes when approving a mortgage application in Spain.
How do Spanish Banks underwrite an application
A few Spanish Lenders use internal scoring systems. Whereby information fed into the scoring system provides initial viability. Development of underwriting tools take into account performance of existing loans. Hiistoric indicators of high or low risk. In conclusion its based on performance of their existing mortgages in Spain. Therefore what looks like perfectly acceptable application may have difficulty gaining an initial viability. For example if they fall into one of the systems high risk categories. Many Banks in Spain however do not have sophisticated underwriting tools. They therefore work to a set level of parameters in terms of debt to income ratios. In addition maximum loan to values. Individual preferences or views of the underwriting teams are another factor.
Can I get a financial approval to lending before committing to a property
Most Spanish Banks will provide a written financial approval. Firstly for the Spanish Mortgage based on the individuals circumstances. Approvals remains subject to valuation of the property. Generated on receipt of a valuation is a binding offer of a mortgage in Spain. Occasionally some Spanish Banks insist a valuation is first undertaken. It is risky using a Bank that works this way. Paying for a valuation before knowing if you will be accepted fiscally is an unnecessary cost. Likewise at what level of interest rate and on what terms.
For further guidance on how to obtain a no cost full financial approval contact us today.
What is the next stage after financial approval
A fiscal approval does not require a valuation. After approval the applicant pays for and undertakes a valuation. Each Bank in Spain has its panel valuation companies. Current legislation states that you can instruct a valuation company of your choice. Some banks may however not accept the application.
The Bank of Spain regulates valuation companies. When providing a mortgage value there are rules. The Valuation report will check legalities of the property. Firstly ensuring certain licenses are in place. Secondly that there are no outstanding infractions against the property. Checks are however to protect the Bank, not the buyer. Consequently for the buyer it should not replace what a Spanish Lawyer would do on their behalf. However a formal valuation provides a further level of security.
Application process in Spain to obtain Mortgage Offer
In the past Banks in Spain only verbally confirmed offers. The loan offers were provided once the valuation was back. At that point a member of the Risk team provided a final sign off. However they were not binding offers. Lack of clarity meant terms of Spanish mortgage signed at notary, could be different to expected. In other words the terms on the deeds were different than anticipated. Without, the client or their representative being aware. For instance different interest rates, a different term, and ancillary products. Moreover once embedded into the signed deed they could not removed at a later date.
All Spanish Banks now have to provide a much higher level of transparency. The new legislation of 16th June 2019, dictates this. Spanish Banks are now required, at offer to provide borrowers with a FIEN and a general information sheet. This document clearly outlines the agreed terms of the loan. This in turn should reflect what is in the deed at completion.
What is a FIEN
A FEIN is a personalized, specific information sheet outlining the basis of the loan offer. At signing, it is now a requirement the Notary checks the deed against the FEIN provided. The Notary is obliged to ensure what the borrower expects, is exactly what is in the deed. The FEIN is also required to show the TAE. The TAE is the annual rate which also takes into account costs of the loan. A minimum of one day before completion its necessary for the borrower or POA to attend the Notary. Within this visit the loan signatory must answer a number of questions. This is to ensure they understand the terms of the loan contract.
Completion of a Spanish Mortgage
What happens at completion
All Spanish mortgages terms are embedded in a legal deed. The deed outlines the terms and obligations for both the lender and the mortgagee. Once signed it is legally binding on both parties. The Notary oversees the transaction. However either the mortgagee, or their representative and a representative from the Bank must be present. The Notary will require the person signing, either speaks Spanish or has an interpreter with them. Understanding what you are signing is important. Bank arrangement fees are payable at completion. Deducted from the gross loan amount.
Post Signing of mortgage deed
Retained at completion are taxes and costs. The paperwork is passed to Land registry. Copies of the deed are given to the client. It must be borne in mind the original deed will not be available until Land registry has agreed it. Occasionally land registry may request that certain matters are clarified before registration takes place. To ensure the loan is secured the lender keeps control of the registration process. Loan deed costs are paid by the Spanish Bank. The purchase deed costs however are paid by the buyer.
When will know exact costs of the transaction
When land registry agrees the transaction the deed is finalised. Until that point exact costs of registration will not be known. Most Banks therefore retain a higher level of costs than required. Any surplus is paid back to the borrower when all invoices are in. Occasionally costs outstrip provision taken and further costs are payable by the client. The Bank will automatically take this from the clients bank account. All deeds and invoices are available once the registration has taken place. Original documents pertaining to the transaction are forwarded to the mortgage holder.
Spanish Lawyer services
A good Spanish Lawyer will ensure all paperwork is gained and held for the client. These documents are crucial when you come to sell your Spanish Property . Firstly they are required to ensure costs can be offset against capital gains tax. Secondly at sale all documents must be provided to the new buyers lawyer. In Spain only costs relating to the purchase deed, and purchase taxes are the responsibility of the borrower.
Post mortgage registration in Spain
Because the terms of the mortgage are in a legal deed changes post completion in most instances instigate the requirement for a new deed. If a new deed is required is deemed a new mortgage. Therefore costs, like early repayment penalties, valuation fee and mortgage arrangement fee may be payable. Changes can be made to the existing deed. These are known as Novacions. These are limited to interest rate adjustments and alterations to the term of the loan.
Under new legislation it is now allowable and encouraged, to move from a variable rate to a fixed rate product. Legislation dictates any cost of doing so will not exceed 0.15% for the first 3 years and 0% thereafter. However in this instance the notary and land registry costs can be responsibility of the borrower.