When secured finance is being raised, people may sometimes be confused about the processes involved.
I thought it would be a good idea to have a jargon free, non technical guide which will hopefully allow you to get more familiar with the secured loan application process. As I am keeping it jargon free, this is not a blow by blow account of how a secured loan is underwritten, but it should improve your knowledge and understanding of what goes on when you apply for a secured loan.
A secured loan is pretty much the same as any other loan. You agree to borrow funds over a set period of time which will be paid back at agreed intervals (usually monthly). The key difference is the loan is secured against an asset (usually your home) which is used as security, meaning your home could be at risk if you are unable to repay the loan as laid out by the credit agreement.
Before I explain how a secured loan is arranged, it’s worth mentioning that there are a number of ways to apply for a secured loan. You could use a broker, your own bank or another high street bank or building society. For the sake of simplicity, I’ll use the term lender to cover the various routes available when applying for a secured loan.
Let’s assume you’ve found the loan you want and are happy with the repayments. The steps for the lender (and I will keep this simple and jargon free) are as follows:
The lender reviews your application and credit file to check you meet their lending criteria. If appropriate, the lender will check your credit score (although this will usually happen before you are given a quote). They will check any documentation required in line with their underwriting criteria, such as proof of address, wage slips and identification.
If everything fits in with their loan criteria, the lender will issue what’s called a binding offer – This will initiate a 7 day consideration which you can forgo by simply returning the binding offer back straight away. Once the lender has this back they should be able to release the funds.
Prior to releasing funds a lender would normally call you to confirm all the details and that you are happy with everything, until this final telephone call happens, it’s unlikely the funds will be released.
Prior to completion, if all the documentation you provide is adequate and they are happy with everything, the lender will instruct valuation.
There are a number of ways a lender would value your property. With the technology available today, it’s at the lender’s discretion if anyone would actually come to your house. They may do what’s called a ‘desktop valuation’ which will give a valuation from a database, or they could instruct what’s called a drive by valuation. This means a surveyor will drive by the property to view it. Usually though, they would instruct what most people consider to be a normal valuation, meaning someone will attend your property to assess its value.
A lender’s valuation enables the lender to confirm the property is worth what you’re stating its worth – Its for the benefit of the lender not the borrower.
Secured loan lenders usually needs to apply for permission from your existing mortgage lender for a secured loan to sit ‘behind’ the mortgage on the deeds.
The reason many people call secured loans a second charge mortgage is that it sits behind your first charge (or main mortgage). Your main mortgage company will be classed as the first mortgage and the secured loan would be classed as your second mortgage.
The process of applying for permission (known in the industry as ‘consent’) is an everyday occurrence and lenders rarely refuse, so whilst it’s an important part of an application, it’s standard and shouldn’t be something to be overly concerned with. Your existing mortgage company will decide whether they will allow a second charge based on the equity in your property and your payment history.
If your first charge mortgage lender consents to the 2nd charge to sit behind their first, and everything above was ok, then you should have no problems getting the secured loan approved and funds released.
The whole process from start to finish could take as little as two weeks, but in general it takes around 3 to 4 weeks. The order in which a lender underwrites the loan may differ from above, but each step would usually need to be addressed, with the lender telephone call being the last task carried out before completion.
As mentioned, during this process you will have a number of cooling off periods where the broker and lender will not be able to contact you – this is to give you time to evaluate the proposed loan and make sure it is right for you.