It’s a sellers’ market. And, as a buyer, you want to make your purchase offer the most competitive. We always recommend writing an offer with a financing condition, even if you’ve been pre-approved for a mortgage. However, in this real estate market, the sellers may force you to remove your financing condition.
Here are things you need to consider when putting an offer on a property without a financing condition.
Will the mortgage lender approve financing on the house?
When we pre-approve a borrower for a mortgage, we do a thorough evaluation of credit risk. We follow the five “C’s” of credit, which include: credit history, capacity, capital, character and collateral. I sometimes get pushback from clients on our requirements to provide income tax information up-front at initial consultations. But the more information we have, the better it is for the borrower because we can resolve any financing issues proactively before they decide to buy a house.
The only thing that cannot be included in the pre-approval is an evaluation of the house that they’ll be buying. Essentially, the house is the collateral for the mortgage loan. If there is any issue with the collateral (or the home), such as an unregistered unit, or the house is in poor condition, the lender may not wish to finance the specific property. This can become costly for the buyers and could also affect the resale value down the road.
Are you prepared to overpay for a property?
In situations where there are multiple offers, emotions can often cloud purchasing decisions. When a client puts 20% or more for the down payment, an appraisal is often a requirement. This is the appraisal that the bank or lender will require to confirm the collateral is sound.
The lender will base the financing on the purchase price or the appraised value, whatever is lower to mitigate against their risk. If the appraised value is less than the purchase price, the borrower may need to put down extra money to make up the difference for the shortfall. This isn’t always a bad situation to be in. Ensure your mortgage professional reviews this scenario in cases where there are no financing conditions. Read more here about the benefits of switching from a bank to a broker.
Bridge Financing: the most misunderstood item of mortgage financing.
If you are selling and buying a home, and dates do not match up on the purchase and sale, bridge financing is a good solution. Bridge financing can only occur if there is a firm offer on both the sale and the purchase. A firm offer is when all conditions have been removed from the offer. If conditions have not been removed on the sale of your property and the closing date for your purchase is approaching, bridge financing is not an option because you technically own two homes on the purchase closing date.
Be sure that your mortgage professional reviews the scenario if you do not sell your home in time for the closing of your purchase an how that will impact your financing.