The legal process of contracting a Spanish Mortgage.
In Spain there are differences to the legal process of contracting a loan to other countries. Whilst many similarities apply the legal requirements in Spain reflect Spanish Law which is not the same as some non residents buyers may be used to.
From June 2019 There is a Europe wide practice to which all Countries and all Banks must adhere to for the information of and arrangement of finance although there will remain differences between countries on what is offered in terms of products and rates. contact us
The Spanish Mortgage Process
Application for financial approval.
Applications for Spanish mortgages reflect, in most instances, the application process of all countries offering property finance.The Spanish Bank will require documentary evidence from the individual confirming who they are, and their fiscal situation in terms of income and debts. Only official documents will be acceptable and each Bank has its own level of requirements which it will have agreed with Bank of Spain is sufficient for full due diligence to be undertaken, and affordability of the loan checked and assessed. All Spanish Banks work on net not gross incomes and will look to see that outgoings on all debt payments including Spain do not exceed their specified ratio. In general, although this will vary from Bank to Bank, no more than 35% of your net incomes should be utilized on debt payments.
How do Spanish Banks underwrite an application
Some banks have an internal scoring system which is applied on all applications and provides an initial viability based on the information fed into the scoring system. The scoring system is developed by an analysis of the Banks back book and has categories that historically indicate high or low risk, based on performance of existing mortgages in Spain. This process can make it difficult for perfectly acceptable applicants to gain an initial viability if they fall into one of the systems high risk categories, even if everything else on the application appears to fit. Many Banks in Spain do not in general have sophisticated underwriting tools so work to a set level of parameters in terms of debt to income ratios and loan to values. Other factors will then include the individual preferences and or views of either the Branch or the Risk Team.
Can I get a financial approval to lending before committing to a property
Most Banks will provide a written financial approval to the Spanish Mortgage based on the individuals circumstances, which is then subject to valuation of the property, before the full mortgage in Spain offer can be generated. Some Spanish Banks insist that a valuation is paid for and undertaken on the property before any analysis of the application can take place. Using a Bank that works this way is risky as the valuation must be paid for before the applicant knows, if they are accepted as an individual, and 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 valuation is not required before pre-approval, once the application is financially approved, the applicant will need to pay for and have undertaken a valuation. Each Bank in Spain has its preferred valuation companies which it wishes to instruct. Under new legislation you can insist that any Bank of Spain registered valuation company of your choice is used but not all Banks in Spain will accept an application where another Banks valuation company is going to be used.
All valuation companies, able to value for mortgage purposes, are regulated by the Bank of Spain and must follow certain rules when assessing the value of the property. Valuation companies will make very extensive checks on the legalities of the property ensuring certain licenses are in place and that there are no outstanding infractions against the property. These checks are done to protect the Bank not the buyer and should not replace what a Spanish Lawyer would do on behalf of the client directly but does give some extra peace of mind.
In the past Banks in Spain only verbally confirmed offers, these were provided once the valuation was back and a final sign off of the loan by a member of the Risk team was made. In the past this had meant on many occasions, when the Spanish mortgage was signed at notary, the terms were different to those expected, and or the deeds were signed on different terms without the client or the client’s representative being aware. These changes could have include the implementation of previously un-discussed floor or minimum rates, different interest rates, different term, or other ancillary products added and embedded into the deed so they could not removed at a later date. Under new legislation due out on the 16th June 2019, put in place to bring EU countries in line the banks will have provide a much higher level of transparency, Spanish Banks are now required at offer to provide clients with a FIEN as well as a general information sheet. The documents will clearly outline and confirm the terms by which the loan has been agreed and should reflect what is in the deed at completion.
What is a FIEN
A FEIN is a personalized and specific information sheet outlining the basis on which the offer has been made and all the terms. At Notary it is now a requirement that the Notary checks the deed against the FEIN provided, and ensures that what the client expects their mortgage to look like is exactly what is in the deeds. The FEIN will be required to show the TAE which will take into account costs of the loan as well as rate. Under the new legislation it will be necessary for the borrower to visit the Notary a minimum of one day before completion to answer a number of questions from a checklist to ensure on day of signing they are aware of the terms of the contract they will be signing.
Completion of a Spanish Mortgage
What happens at completion
All Spanish mortgages are embedded in a legal deed. This deed outlines the exact terms and obligations of both the lender and the mortgagee. Once signed it is legally binding on both parties. The Notary oversees the transaction but either the mortgagee or their representative along with a representative from the Bank must be present at signing. The Notary will require that the person signing either speaks Spanish or has an interpreter with them so they can ensure that what is being signed is understood. It is at completion that monies required to finalize the mortgage including the Bank arrangement fee are taken. These are deducted from the gross loan amount.
Post Signing of mortgage deed
After the loan is signed, and any anticipated level of taxes or costs are retained as a provision of funds, the paperwork is passed to Land registry to be registered. A copy of the deed is given to the client but the original deed may not be available until Land registry has reviewed it and agreed it. On an odd occasion land registry may request that certain matters are clarified before registration can take place. The lending bank will always keep control of the registration process to ensure their loan is fully secured and the cost of doing this is included in the Banks, notary and land registry assessment of costs.
When will know exact costs of the transaction
Until land registry agrees the transaction, the deed is not finalized and actual costs of registration will not be known. Most Banks retain a higher level of costs than they feel will be required and rebate this back to the client when all invoices are in. Occasionally costs outstrip the provision taken and further costs are payable by the client, which the Bank will automatically take from the clients account. All deeds and invoices are available once the registration has taken place and should be forwarded to the mortgage holder. 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 and are required both to ensure costs can be offset against capital gains tax, and all documents can be provided to the new buyers lawyer. In the future under the new legislation of June 16th 2019 only costs relating to the purchase deed and purchase taxes will be the responsibility of the borrower.
Post mortgage registration in Spain
Because the terms of the mortgage are embedded in a legal deed any changes post completion to the loan terms will in most instances instigate the requirement for a new deed. If a new deed is required it is deemed to be a new mortgage and costs of the mortgage like early repayment penalties, valuation fee and arrangement fee can be payable. Some changes can be agreed with existing lender, which are dealt with by changes to the existing deed known a “Novacions” but these changes are limited by current law to interest rate adjustments or adjustments to the length of the term of the loan.
Under the new legislation you will be allowed and even encouraged at any point to move from a variable rate to a fixed rate product and costs of doing so will not exceed 0.15% for the first 3 years and 0% thereafter although in this instance the notary and land registry costs can still be responsibility of the borrower.