Having been in the real estate business for over 20 years I have never put much credence or trust in Buyers being “pre-approved” or “pre-qualified” for a mortgage. Over the past couple of years, the demand for residential housing in many parts of Canada has been exceedingly strong with many properties attracting multiple offers. This typically results in properties selling for well above their respective asking prices and while this is of great benefit to Sellers, it poses a risk and potential disappointment for the Buyers that loose out on getting the home they want or need.
When Buyer clients have told me they are “pre-approved” for a mortgage my reply has always been “you may be pre-approved but the property you are buying and the price you are willing to pay has not been approved.” When I ask further if they have received written confirmation from their bank as to their approval the answer has often been “no but we spoke to them.” Needless-to-say that’s hardly an approval.
Even though a Buyer(s) is pre-approved and has received written confirmation from their bank that does not necessarily mean their mortgage approval can be taken as a done deal especially if their purchase is over the asking price. As such, I have always drafted offers for Buyer clients putting in a finance condition even if only for a couple of days just to get the bank’s final approval wherein the condition can be fulfilled or waived.
This practice has never been more important or appropriate than it is today. Banks are becoming cautious about what’s happening in the real estate market right now and I know of one major bank that is currently not doing “pre-approvals.” Instead, they insist that their perspective mortgage borrower produce a bona fide accepted Agreement of Purchase and Sale on a property and even then, chances are the bank will also have an appraisal done in order to determine if the purchase price is consistent with the home’s value. Unfortunately this is of no help in circumstances where the Buyer(s) is in a competitive offer situation and they need to go in putting their best foot forward with a clean offer often with NO conditions whether for financing, a home inspection, attaining insurance or other issues.
Over the past couple of years, I have seen a number of real estate deals fall apart due to financing issues. In many cases the Buyer(s) was unable to get financing they required and it was not necessarily the Buyer’s credit. In some instances, the bank’s appraisal of the property in question came in well under the price that the Seller(s) and Buyer(s) had agreed to. Just this past week or two I heard of one instance in Toronto where the bank’s appraised value came in $300,000 below the purchase price. That begs the question, how many Buyers have an extra $50,000, $100,000, $300,000 or more lying around these days to make up the difference?
Given current market conditions with multiple offers and Buyers going in well over the asking price to purchase a home, it’s not hard to understand why many Buyers are forced to forego finance and home inspection conditions but that is a gamble for which both Sellers and Buyers are at risk. Sellers may have already or are in the process of buying another home and many will need the equity (money) out of their current home to complete the purchase of the second. If the sale of their current house falls apart due to the Buyer’s inability to secure financing, no one wants to end up with and or can potentially afford owning and making payments on two homes. In circumstances like this things could get very messy for both the consumers as well as their respective REALTORS®.
When the market is as active as it is right now with limited inventory it is very easy to get overly confident thinking that your home will sell quickly and for a big price. But ask yourself “what if it doesn’t?” Can we afford to carry two homes? Will our bank give us bridge financing if needed?
Add to what are already robust market conditions there is also the issue of mortgage fraud, money laundering and more. As such, this is clearly not a time to be looking for or assuming guarantees as to available financing unless of course your purchase is all cash. Banks are being cautious and rightly so. Many of us are seeing some crazy prices being paid right now with houses being purchased for amounts well over even their replacement cost value. That makes no sense and I for one would caution any of my clients about getting carried away and “paying too much” when they are trying to outbid someone else.
Since our last recessionary period which was triggered in part by the real estate crash in the U.S. back in 2007 through 2009, we have had had over 10 years of strong demand for housing with substantial price increases. As such, I for one believe that we are clearly due for a market correction, when that happens is anyone’s guess. There are several articles out there right now stating that Canada Mortgage and Housing has been preparing forecasts re: what may happen to housing prices once the pandemic is behind us. Never in our lifetime have we been through anything like COVID 19, a global pandemic with a yet unknown impact on the world’s economies both short and long term. This is further evidence and reason for any of us not to put too much emphasis and or trust in mortgage pre-approvalspre-qualifications. Thus far COVID 19 has been a moving target and it’s far from over.
Over the long term real estate has always been a good investment but like most places to put money, its not fool proof. As a full time REALTOR® my job is NOT about selling. Rather, it’s about helping my valued Seller and Buyer clients in making informed, rational decisions about their selling and buying needs. Never has that been more important than in these very different and challenging times.
Contact Me for a no obligation consultation of your particular real estate needs and or objectives and I will put my 20 plus years of knowledge and experience to work for you.
In the meantime, stay safe and stay healthy….