Problems with Bank-Fin

Bank-Financed purchases, what can go wrong? Here, I'll discuss two of the most common problems when it comes to bank-financed purchases.

1. Forfeiture of earnest money

When a buyer likes a property, he submits an offer letter stating the conditions of the purchase. Among these conditions is when the seller reserves the property while the buyer applies for a bank loan. Of course, the seller will demand non-refundable earnest money to be paid as a show of good faith. This payment is where the problem lies.

Buyers would typically pay earnest money and ask for roughly a month for the rest of the problem to be completed.

If everything goes smoothly, he could get the Letter of Guarantee within 3-4 weeks. The problem occurs when banks reject the application or if the buyer negotiates the interest rate down.

When the buyer realizes that the bank rejected their application or request a lower rate, they will go to another bank and repeat the process. By this time, the one-month hold period has lapsed, and the buyer would have forfeited the earnest money.

Couldn't buyers ask for a longer period of hold time, say two months? They could try. But sellers would likely ask for more earnest money, which most buyers would detest.

To avoid forfeiture, buyers typically skip paying any earnest money and proceed with their bank application. Of course, the seller could choose to go with someone else if a cash buyer came along.

How can you avoid this problem?

Before shopping for a property, buyers could ask their bank for pre-approval (called "table approval"). Some banks allow this. Another way to mitigate this problem is to make multiple applications with different banks, so there are backups in case one falls through.

2. BIR assesses VAT and CWT

The Letter of Guarantee issued by the bank would state a deadline for which the transfer has to be completed. What happens if the title transfer encounters problems (such as the BIR assessing Creditable Withholding Tax and VAT on the sale)?

Likely, the seller would disagree with the BIR's assessment. Meanwhile, the title transfer is stuck; the deadline for paying taxes is ticking, and the seller still needs to receive the bank proceeds.

How can you avoid this problem?

In deeds of absolute sale, we always write:

"NOW, THEREFORE, for and in consideration of the foregoing premises and especially the sum of XXX, inclusive of Capital Gains Tax, Creditable Withholding Tax, Value Added Tax (VAT), whichever may apply."

So if the BIR assesses CWT+VAT on the sale, the buyer could use the 6% amount withheld (supposedly for Capital Gains Tax) to pay for the Creditable Withholding Tax.

What about the VAT?

The payment of VAT is not a pre-requisite for title transfers. Only the Creditable Withholding Tax and Documentary Stamp Tax are required to process the BIR Certificate Authorizing Registration.

Aside from these two problems, everything else is quite remote.