Unlicensed Real Estate and Home Loans: When Does the Bank Say Yes?

When issuing home loans, banks take into account a great many different circumstances, ranging from the borrower's financial behavior to the correct documentation of the property being purchased. Time and again, people have a question in this regard: will the bank provide a home loan for purchasing real estate that lacks a certificate of occupancy? Yes, it will, but this depends on the circumstances, explains Anne Pärgma, head of the lending department at Swedbank.

In building construction, there are two important milestones from a documentation perspective – first, a building permit is issued for the building so that construction can begin. Later, when the building has been constructed in accordance with the building permit, a certificate of occupancy is issued for it, which is an important document proving that the building is complete, that it has been built in accordance with the law and the project, and that safety is ensured. To obtain a certificate of occupancy, the building must comply with all the requirements set out in the building permit and the construction project.

Thus, a building may lack a certificate of occupancy or its issuance may be delayed for very different reasons, and it does happen that people submit a loan application for purchasing real estate that lacks a certificate of occupancy. Most often these are related to single-family homes, but this issue also affects apartment buildings with, for example, problematic additions.

When we receive a loan request for real estate without a certificate of occupancy, we first investigate the reasons why the property does not have a certificate of occupancy. Next, we are interested in whether the new owner wishes to change this situation and whether it is possible at all to request a certificate of occupancy for this real estate. If it is possible and the new owner plans to do so, then generally there are no problems with issuing the loan. Here it is possible to add a condition and a deadline to the home loan contract by which the building's documentation will be put in order.

However, if a certificate of occupancy is not possible to obtain in the foreseeable future, this does not mean that a person cannot get a home loan to purchase this real estate. Let us take, for example, a situation where a building does not have a certificate of occupancy because it is located in Kadriorg in Tallinn and it is required to have a certain type of wooden windows, but instead the apartment building has plastic windows. It is probably unthinkable that a client wishing to purchase one apartment could quickly influence the entire building's windows to be replaced. In such a case, the bank can provide a loan even if a certificate of occupancy cannot be obtained in the near future.

However, quite a different situation is when a building lacks a certificate of occupancy because it does not meet certain safety requirements. In our work, we often see situations where a building has had an addition, for example, a developed attic, but it does not meet fire safety requirements. In such a situation, the bank probably cannot issue a home loan unless the solution described above is reached, where bringing the building into compliance with requirements and obtaining a certificate of occupancy are added as a time-limited condition of the loan contract.

One important aspect that must be taken into account is the connection between the existence of correct and lawful documentation of buildings and insurance. Namely, the real estate offered as security for a bank loan must be insured, and this is entirely necessary, especially first and foremost for the protection of the person themselves.

If a building lacks correct documentation, insurance may in certain cases reduce compensation or refuse to cover the costs associated with an accident. For example, the unauthorized retrofitting of building systems in the form of heat pump installation. A heat pump is a heating device and its installation involves changes to the building systems of the structure, i.e., the retrofitting of the residence. According to the Building Code, retrofitting a residence requires submitting a building notice and project to the local government. In the case of an apartment building, the installation of an air-source heat pump also requires the consent of the homeowners' association. According to the Building Code, a notice of use must be submitted when the structure is completed and one wishes to begin using the structure or part of it, and in connection with this, the requirements for the use of the structure are met. When applying for a certificate of occupancy, the building is also inspected by the Rescue Board to determine whether it is safe for habitation and to draw attention to any deficiencies if there are any.

If a fire originates from an unauthorized air-source heat pump and it turns out that the cause is, for example, faulty construction work, planning or design errors, or the use of unsuitable materials, then depending on the insurance conditions, the insurance company may pay out a smaller indemnity from the total damage or refuse compensation altogether. Insurance conditions vary from company to company, so it is worth consulting with an insurance specialist for more detailed information.

However, the loan applicant must take into account that safety-related matters are very important to the bank and situations may arise where it is not possible to issue a loan due to the lack of a certificate of occupancy. Each property has its own "story" that needs to be investigated.