Some buyers are being pressured to limit (or even eliminate) conditions in their offer to purchase these days. If you need an inspection, get it done fast before you make your offer. If you are going to need a mortgage, make sure you are pre-qualified well in advance.
But does that mean you are good to go? What can go wrong?
Well, what if your property is deemed unworthy of mortgage financing? For example, maybe there is structural damage, or the house is old and has knob and tube wiring? We recently wrote about this.
Or what if the price you are willing to pay is much higher than the lender’s view of its value? Can you still close? Let’s talk first about the value of your dream home.
We have all heard of houses priced deliberately low; and when the dust settled on a spirited auction of competing offers, the final price maybe over the asking price by tens, even hundreds of thousands of dollars.
Mortgage lenders always need to assess the home’s value relative to your purchase price. In some cases, an appraiser may not be even sent to the property, and the lender may only rely on an automated valuation methodology (AVM).
In a hot market like Toronto and Vancouver, real estate agents sometimes complain that appraisal values are not keeping up with the market. This can result in the appraised value coming in lower than the offer price. For some buyers, this might be a deal breaker – they may feel they are over paying.
Or it may kill the deal because the buyers’ financing strategy does not allow them any wiggle room. For example, suppose you only have enough for a 5% down payment, and the appraisal comes in 5% lower than the offer price.
If there is a condition of financing in your offer to purchase, a low appraisal result does allow you to walk away from the buy, if that’s what you want to do. Or it can take you back to the table, and you can ask your realtor to negotiate a lower purchase price for you.
Suppose your bank approved you, and now the appraisal comes in low. This does not necessarily kill your mortgage approval.
Your mortgage lender will first assess if they are okay advancing the monies they previously committed to. If yes, you are good to go. Or, your lender may simply approve a lower mortgage amount, meaning the house is still yours if you are willing to pony up some extra dollars and increase your down payment. (Every case is judged on its own merits)
Leaving one solitary condition like “subject to appraisal” might be the right way to go in a hot market. It tells the seller you are not worried about financing (getting a mortgage) which coupled with your husky deposit, agreeable closing date and (maybe, see above) your no inspection clause, it is a pretty darn clean offer.
It also gives you an out – since withdrawing an offer following an appraisal should not cause you a problem in my opinion.
Related Article: What if your appraisal reveals problems
Before you co-sign someone’s loan application, understand you are essentially loaning your personal credit history to that person.