Published: July 15, 2015 • Last updated: October 27, 2020 at 10:24 am
Even a rock solid pre-approval does not mean you are good to go.
During the recent hot spring market, we had several instances where appraisals played a key role in determining the success of a purchase offer. Today I will share a few stories with you. They are all good examples of how even a rock solid pre-approval does not mean you are good to go.
1. Colin lives in Calgary and bought his first home in an area not far from the Bow Valley.
Colin was a very strong applicant, and his credit, income, employment and down payment were all exemplary. He had been pre-approved for a mortgage without hesitation.
But lenders all recall the flood damage done in and around Calgary a couple of years ago and are very sensitive to lending money against homes which might be flood risks. A couple of lenders passed on this deal immediately, but fortunately MCAP came through with Genworth in support.
They both conditioned that the appraisal must confirm the property is outside the flood zone. Fortunately it is, and Colin is now a happy homeowner. There were a few anxious moments though, as the issue was revisited twice more!
2. Manish is a contractor who likes to buy run down properties and fix them up.
After they are done, he typically sells them for a profit or he converts them into rental properties. He found a very old detached fixer upper in an up and coming part of Toronto. He plans to gut it pretty much from the inside out.
Manish had a 35% down payment, excellent credit, and enough activity in his business bank account that qualifying for a mortgage would not be a problem with one of our lenders who will consider a “stated income” approach to self employed applicants.
But the appraisal revealed knob and tube wiring in different parts of the house. All of a sudden, the lender began to develop cold feet. It turns out their biggest concern was whether or not Manish would be able to insure the property – most property insurers will not touch such properties.
Fortunately Manish hooked up with a savvy insurance broker who got the job done, and the purchase went through.
3. Colleen and Javed are first time buyers who had been shut out of three consecutive multi-offer situations.
They were feeling blue. They increased their budget each time they were rejected, but still, the market was so hot they could not seal the deal. Finally their offer of $735,000 on a starter home (!) in Toronto was accepted, and they had five business days to remove their conditions of financing and inspection.
May was a crazy busy month this year, and it took the lender almost two full days to respond to the application. They said that Genworth, the mortgage insurer, were insisting on an appraisal done immediately, prior to issuing an approval. Their concern was that the purchase price might be too high. We wrote about this recently.
With only a 5% down payment, Genworth and the lender wanted to be sure they were not lending on a property which was already “under water”.
This meant the approval process was going right down to the wire – and it took pretty much every hour of their five business days before Javed and Colleen could be sure they were approved. Until they had a commitment in hand, they could not authorize their real estate agent to lift the condition. Another happy ending, but in each case, the appraisal played a key role in the mortgage approval process.