Pre-financing request with higher equity ratio

Hello everyone,

I am a complete beginner when it comes to homeownership and have so far only read the "Stern Guide: In 10 Steps to Your Own Home" (it was available in the library as a handy e-book – easily accessible during lockdown times). And somewhere I have to start asking...

I believe I have understood by now that the first step involving "external" persons when building or buying a house is going to the financer or bank.

Furthermore, I think I have understood that you should ideally get a preliminary financing commitment, which does not yet apply to a specific property but is initially a commitment that at the time of issue the bank would provide a loan up to a certain amount. With this, you could quickly convince the seller that you are also able to seriously carry out the purchase.

Normally, one assumes 20 or 25 percent equity. However, I would assume that we would go into the race with significantly more equity (concrete numbers perhaps later, if I haven’t completely embarrassed myself here). Now to the question: For what amount should one get the commitment? Or does the bank offer a maximum amount based on the monthly net income anyway, which you would not later draw on in full? (I suppose the exact conditions are only revealed with the concrete commitment?)

I can imagine that banks could well have their own interests: If they themselves broker real estate, they might try to push you into buying an overpriced and possibly unnecessarily large property in order to additionally take a commission. And a high loan granted also means for them that they have to pay less negative interest on their deposits and instead generate regular interest income. If that is the case, then it is not automatically illegitimate, but it could lead to an advisory conversation resulting in a different outcome than I would wish.

Now, you could tell the banker directly that such a large loan is not necessary. Possibly, I don’t know, I would then receive a document stating a much lower amount committed. But then again, a potential seller would still need to be convinced that the commitment does not mean that I am unable to make the purchase, but that the remaining money will come from equity, which presumably would not appear in the commitment.

So: Is there a good practice for this question? Or an almost mandatory procedure? Or would the banker advise me neutrally anyway if I ask them directly?

Thanks in advance!

Furthermore, I believe I understood that you should preferably get a preliminary financing commitment, which does not yet apply to a specific property, but is initially a promise that at the time of issuance the bank would grant a loan up to a certain amount. With that, you could quickly convince the seller that you are also capable of seriously carrying out the purchase.

Not quite right. You talk to the bank - but please with your house bank, chatting with direct banks doesn’t work so well - and discuss a financing framework. Once you have a property, you get a non-binding "financing confirmation" issued that fits this property. It states an amount X and is subject to property inspection.
All of this is totally non-binding and not worth the paper it’s written on – but the sellers really fall for it. Because it might be that the bank then in the worst case doesn’t want the property and you won’t get a financing at all.

I can imagine that banks could indeed pursue their own interests:

Doesn’t every seller want that?

If they themselves broker real estate, they might try to pressure you into buying an overpriced and possibly not needed-in-size property to earn an additional commission. And a high granted loan also means for them that they have to pay less negative interest on their deposits, and instead generate regular interest income. If that is the case, it is not automatically illegitimate, but it could lead to a consultation resulting in a different outcome than I would prefer.

What does that have to do with a financing confirmation? You decide what you do next. Not the bank.

Now to the question: For what amount do you get the commitment? Or does the bank give you the maximum possible amount based on monthly net income anyway, which you would later not fully draw? (I suspect that you learn the exact conditions only with the actual commitment anyway?)

The bank doesn’t commit to anything. Just vague nonsense. A household budget is drawn up based on which a financing X is possible. When you find a property, you have the confirmation issued for the amount you need. Only then, not before.

There are no financing confirmations without an object. A financing confirmation is a loan agreement from the bank.

Everything else is a marketing gimmick.

You go to your house bank, discuss your financial framework, and start looking. And please be careful, bankers are not life advisors. They will usually give you a little more than you need, than you can afford.

Like a butcher at the sausage counter, "would you like a little more?"

You are overthinking things a bit and making the whole thing more complicated.

Actually, it’s quite simple, you go to your main bank or a financing broker and ask what your theoretical financial limit is, what they would finance for you at most. That’s roughly something like 110 times your monthly net income. Anyway, this amount together with your equity is what you can spend. Quite simple.

If you have found a property, the bank will check again from the beginning whether and at what interest rate they want to finance this for you. Now you can still negotiate the interest rate a bit or not, or you take another bank. No one forces you into anything. Since you let it be known that you have equity, you should be able to find financing without problems (if income, house etc. are also all within the normal range).

Most real estate is not brokered by banks, but privately or by independent brokers. Therefore, you don’t need to be afraid of the bank/broker combination. Nobody will rip you off, because the price structure is transparent everywhere. Every seller wants to achieve the maximum selling price, there are no bargains on the public market. Broker commission is fixed and known. Banks are subject to competition. Whether and how you can negotiate selling price or interest rate, of course, depends on the individual case.

Besides the main bank, it is also worth – depending on the region – inquiring with the local bank where you want to acquire the property for financing and then making it the main bank. After several pleasant conversations with the local Sparkasse, we received by far the best offer. Local banks can often better assess the value of older existing properties.

Thank you very much, I think that makes me wiser already.