Many buyers get pre-qualified for financing before they start looking for a home. This means that they find out in advance the maximum amount that a lender will provide to them based on their income. The mistake is thinking that no matter what home you buy, the lender will just give you the money you need, provided that it is within your approval limit.
Buyers need to realize that just because a lender pre-approves you does not mean they will lend you all the money. The property you buy must, in the lender’s opinion, be worth what you paid for it.
Most real estate agreements are conditional for a few days on the buyer arranging satisfactory financing. In many cases, however, the buyer waives the condition before the lender conducts an appraisal of the home itself. Even worse, in most bidding wars, buyers do not even include a condition on financing, hoping that their pre-approval will be enough.
In the last two months, I have seen two situations where lenders requested an appraisal of the property just days before closing, and when the appraisal stated that the house was not worth what the buyers paid, the lender just cancelled the loan. The buyers had already paid the deposits and were preparing to close. Now they faced the possibility of losing their deposits and getting sued.
In both cases, we were initially able to arrange for an extension of the closing date to give the buyers time to solve their problem. In one case, the mortgage broker got creative and was able to find the buyer a new mortgage, albeit at a higher interest rate and for a shorter term than the original mortgage. Still, the deal got done.
In the second situation, the buyer had purchased a brand new condominium from an original investor, who flipped it just before closing. The original price was $200,000 when the development started four years ago, but the buyer today paid $240,000. The problem was that when the bank asked for the appraisal, the appraiser said that since other investors closed at the original price of $200,000, he would not agree that the unit had in fact appreciated to $240,000 today. The buyer was fortunate to have relatives who lent him the shortfall to close the deal.
Buyers, when you are looking at potential lenders to assist with your home purchase, ask in advance how long it takes them to do their appraisals. Many lenders can get this done within 3-4 days, so that you can have assurance that you will get all your money before you have to waive any financing condition.
Be very careful about bidding on a home without a financing condition, unless you budget an additional 10 per cent down payment in reserve, just in case the lender surprises you just before closing with a reduced loan. Being prepared will assist you in closing on time, and with the right amount of money.
Mark Weisleder is a Toronto real estate lawyer. Contact him at firstname.lastname@example.org