Now that we have new mortgage rules, it is more important than ever before to include the financing condition in any offer or be otherwise prepared for the consequences.
Pre-approvals are no guarantee you will obtain financing.
Too many buyers are cavalier about submitting offers without a financing condition, especially during the pressure of a bidding war. They must understand that even with a pre-approval, the lender must be satisfied with its own appraisal. The foundation for most appraisals is, what would a willing buyer pay a willing seller, WITHOUT pressure?
In a bidding war, there is almost always pressure on the buyer.
This is why the appraisal will likely be lower than what the buyer offered and the lender will offer you less money than they hoped for. The answer is always to have an extra five to ten per cent of the down payment in reserve to protect yourself. In a condominium purchase, if it is conditional upon review of a status certificate, use that time to also make sure your financing is in order.
Lenders can change their mind right up until the day of closing.
Even if you are approved after they sign the agreement, the lender can still change its mind based on anything that they may learn before they advance the funds. There are usually many conditions attached to any loan approval, such as verification of income, down payment and employment. Make sure you work with your mortgage broker to satisfy all of these conditions and requirements as soon as possible in the process.
The worst words a lawyer can hear from a lender on the day of closing is “The file is in underwriting”. This typically means that someone else is reviewing the entire file because issues have arisen. In some cases this can result in the entire loan being cancelled, right on the day of closing. If your lawyer can send and receive funds via wire transfer, the deals can still be completed even when lenders are late transferring funds to the trust account. You might want to check with your lawyer to see if he/she does indeed use a wire transfer service.
Always know the net amount you will receive from your lender.
Every mortgage commitment is different. Some may contain up-front fees for arranging the loan, appraisals, CMHC fees and sales tax, and interest to the interest adjustment date. All of these fees are deducted right off the top, before the balance is sent to the lawyer on the day of closing. The bottom line is that you must know the exact amount that will be sent to your lawyer on closing, to make sure there is enough to make up the rest of the down payment, land transfer tax and legal fees. Give your lawyer the mortgage instructions early in the process so the lawyer can let you know the net amount you will need to complete the transaction in a timely manner.
If you do not want a finance condition in the agreement.
If you want to go ahead and put the offer in without a finance condition, you will be asked to put that instruction in writing.
This is a very competitive real estate market, and I know you may be tempted to take chances that the financing will come through okay. But a lot can happen to put the brakes on the mortgage loan you require. Get the commitment in writing and take the worry out.
(Article courtesy of Mark Weislender)