Mortgages – Frequently Asked Questions and Answers, Part 3.

Be sure to read the first and second parts of this series as well.

1. In the first part, you’ll learn how to sell a property with an outstanding mortgage, how a renovation mortgage works, and whether and why you need property insurance to get a mortgage.
2. In the second part, you’ll learn about non-bank mortgage options and why they may or may not be worth it. You’ll also find a description of how a mortgage works for a property in foreclosure that you acquired at auction. You’ll also find out whether it’s possible to take out a mortgage on commercial real estate and what alternatives might be available. Finally, you can explore how early mortgage repayment works.

Quick Overview:

• A mortgage for a cooperative apartment is possible, for example, if you secure the loan with another suitable property; pre-mortgage financing may also be an option if you plan to convert the apartment to private ownership.
• A mortgage without down payment is not standard. For owner-occupied housing, the general LTV (loan-to-value) limit is 80%; for applicants under 36 years of age, it is up to 90%.
• Under certain conditions, a mortgage can also be used to finance a building lot.
• If you do not wish to use the property you are purchasing as collateral, the bank may accept another suitable property as collateral.
• The specific terms always depend on the bank, the value of the collateral, the applicant’s creditworthiness, and the purpose of the financing.

Are you buying a property with a mortgage and unsure about the purchase agreement, the lien, or the secure transfer of funds? Our attorneys will review the legal aspects of the property purchase and prepare the contracts so that both the financing and the transfer proceed safely.

Is it possible to buy a single-family home on an installment plan without a mortgage?

Not everyone qualifies for a mortgage due to its strict conditions, and many people also do not want to use their property as collateral. At the same time, however, many people find it difficult to save enough money to buy a house. So the question is: Is it possible to buy a single-family home on an installment plan without a mortgage? And our answer is: Yes, it is.

The first option is to take out a type of loan other than a mortgage, for which you won’t have to use your property as collateral. A popular option, for example, is a personal loan, which doesn’t have a specific purpose and for which you don’t pledge your property as collateral. It’s usually repaid in monthly installments and doesn’t have a fixed-rate period like a mortgage does. However, its disadvantage is the low amount the bank will lend you (usually between one million and one and a half million crowns). Another disadvantage is the limited repayment period, which generally does not exceed 10 years.

Another option is to take advantage of the “house on installment” services offered by some real estate agencies or construction companies. You can either buy an older house or have a new one built to your specifications, and then make regular payments for the house in the form of rent. This allows you to acquire a home with virtually no down payment and without having to meet the conditions set by the Czech National Bank (ČNB). A clear advantage of this method is that almost anyone can own a home, whether they lack the minimum down payment or have an entry in the debtors’ registry. The problem, however, is that these services are often non-transparent and contain many hidden fees. As a result, you may end up losing your dream home.

Is it possible to get a mortgage without any of your own funds?

Amortgage without any down payment is not a common solution today. The Czech National Bank generally sets the maximum LTV at 80% of the value of the mortgaged property, and up to 90% for applicants under 36 years of age purchasing their first home. The applicant must therefore generally cover the remaining portion of the purchase price from their own funds.

However, this does not mean that you must always have the entire remaining amount in cash. In some cases, for example, pledging an additional property as collateral can help, as it increases the total value of the collateral. Specific options depend on the property appraisals and the rules of the particular bank.

What are the terms of a mortgage for land?

First and foremost, it’s important to note that, as a rule, you can only obtain a mortgage for land designated for development. You can find out whether you can actually build a house on the plot of land you’ve chosen by checking the land registry extract or the local zoning plan. The land must also be free of third-party rights, liens, or other legal encumbrances that would prevent it from being used as collateral.

Another requirement for obtaining a mortgage on a plot of land is that it must have an access road. If there is no public road leading to the plot and it is necessary to cross private property, you will usually need to provide proof of an easement allowing passage.

What to Keep in Mind When Choosing a Plot of Land

Before buying land to build a single-family home, you should consider several factors:

• Proximity to work, schools, healthcare, and community amenities: You should consider travel distances to essential services. Also, check the character, safety, and amenities of the neighborhood. Consider factors such as noise, crime, and nearby parks or recreational areas.
• Zoning Plan: Confirm that the lot is actually zoned for single-family home construction, and find out about specific building restrictions, such as limits on the height or type of structure.
• Utilities: Determine whether the lot is connected to water, sewer, electricity, gas, and the internet. If not, assess the costs and feasibility of connecting to these services.
• Easements: Check the land registry for any easements that may affect your use of the property.

• Soil Quality and Stability: Conduct a soil test to determine whether the soil is suitable for construction. Soil conditions can significantly affect construction costs and the type of foundation required.
• Slope and drainage: Consider the slope of the lot to prevent problems with poor drainage.
• Protected Areas and Restrictions: Find out if any environmental restrictions or regulations apply to the property.
• Future Development: Research nearby development plans or trends that could affect the property’s resale value over time. For example, a busy road might be built behind your yard in the future.

Can You Get a Mortgage for a Co-op Apartment?

Many people are attracted to the idea of a cooperative apartment. The main reason is that these apartments are significantly less expensive than privately owned apartments. But what about a mortgage?

As a rule, you cannot use the cooperative apartment itself as collateral for a mortgage because, legally, you do not own the apartment unit but rather a cooperative share. You can only obtain a mortgage with real estate as collateral, and a cooperative apartment cannot be used as collateral. This is because, from a legal standpoint, you do not own the cooperative apartment. When you purchase a cooperative apartment, you are not buying the apartment itself but a share in the cooperative; therefore, the apartment itself does not officially belong to you.

However, this does not mean that a mortgage for a cooperative apartment is out of the question entirely. A mortgage loan can also be used to finance the purchase of a cooperative share if you secure it with another suitable property —for example, your own apartment or house, or a property owned by another person who consents to the collateral. However, the cooperative apartment itself generally cannot serve as collateral.

You can take out a mortgage on a cooperative apartment if you own another property that you could use as collateral instead of the cooperative apartment. However, this property should be worth an amount equivalent to the purchase price of the cooperative apartment in order for you to receive a sufficiently large mortgage. Another option is a different type of loan for a cooperative apartment, such as the consumer loan mentioned earlier. However, this type of loan has a limited repayment period and a low maximum amount.

A major advantage for you is that if the housing cooperative plans to convert the apartments into private ownership, it is possible to take out a mortgage directly on the cooperative apartment. Specifically, this would be a so-called pre-mortgage loan. To obtain it, however, you’ll need to provide confirmation from the housing cooperative regarding the planned transfer of the cooperative apartment to private ownership within the timeframe required by the specific bank. Once the transfer takes place, the pre-mortgage loan will be converted into a standard mortgage, and the apartment will be pledged as collateral to the bank.

Is it possible to take out a mortgage without using real estate as collateral?

You can take out a traditional mortgage without real estate collateral only for a limited time in the form of a bridge loan or an advance mortgage. After a certain period, however, you’ll need to convert it to a standard mortgage. We’ve already discussed both types of mortgages in the second part of this series, in the chapter on mortgages for properties subject to foreclosure. As a reminder, here’s a summary:

A pre-mortgage loan is a temporary form of financing used in situations where the loan cannot yet be secured by the property being financed. As soon as it becomes possible to pledge the property as collateral, the financing is typically converted into a standard mortgage loan. The maximum amount and the timeframe within which the property must be pledged as collateral depend on the terms and conditions of the specific bank.

An “upfront mortgage,” also known as a mortgage without a property, involves arranging this type of loan with a bank before you have a clear idea of what property you’ll purchase with it. You usually have up to three years to do this, and once you choose a property, this pre-approved mortgage becomes a standard mortgage. Be careful, though—if you don’t find a property within the specified time, you could face hefty penalties.

How do you use another property as collateral for a mortgage?

If, for some reason, you do not want to use the property for which you are taking out a mortgage as collateral—or if the value of that property is insufficient—you have the option of using another property as collateral. You can use a house or an apartment as collateral, but it must be intended for residential use (so if it’s used solely for business purposes, for example, you cannot use it as collateral). This is because properties intended for business purposes are not considered as valuable by banks as those intended for residential use. You will also need the property owner’s consent to use the property as collateral.

From our experience: When purchasing a property financed by a mortgage, the legal status of the property is often a bigger problem than the loan approval itself. For example, it is not until the financing process is underway that the buyer discovers that the property is encumbered by an easement, a lien, or some other legal defect that the bank is unwilling to accept. Therefore, we recommend reviewing the title deed and contractual documentation before signing a binding purchase agreement.

A recreational property, such as a cabin or cottage,can also be used as collateral. However, this property must be suitable for year-round occupancy. This means it must have a street address, an access road, and connections to water, electricity, and other utilities necessary for year-round occupancy. Another option for collateral is land. However, it must be a building lot.

To conclude this series, we’d like to remind you that decisions regarding mortgages and financing your property are truly complex and require careful consideration of various factors. Every person and their situation is unique, which is why it’s important to consult with experts and ensure you take the correct legal steps. In the world of finance and real estate, nothing is entirely straightforward, so it pays to ask for help.

Summary

A mortgage can be used to finance not only an apartment or a house, but under certain conditions also a building lot or the purchase of a cooperative share, provided the loan is secured by another suitable property. A mortgage without down payment is not standard today, as the typical LTV limit is 80 percent, rising to 90 percent for applicants under 36 years of age purchasing their first home. If the property being purchased cannot be or will not be used as collateral, the bank may accept another suitable property. For a cooperative apartment, pre-mortgage financing may be an option if a transfer to personal ownership is planned. However, the specific terms, financing term, and acceptable collateral vary depending on the bank and the applicant’s situation.

Be sure to read the first and second installments of this series as well.

1. In the first part, you’ll learn how to sell a property with an existing mortgage, how a renovation mortgage works, and whether—and why—you need property insurance to get a mortgage.
2. In the second part, you’ll learn about non-bank mortgage options and why they may or may not be worth it. You’ll also find a description of how a mortgage works for a property in foreclosure that you acquired at auction. You’ll also find out whether it’s possible to get a mortgage on a commercial property and what alternatives might be available. Finally, you can learn how early mortgage repayment works.