The Hazards of Waiving Financing Conditions
My brokerage is affiliated with Axiom Mortgage Partners and they recently posted the following article in an internal newsletter. This is really important and worth reading. I don't know why anyone would write an offer on a property without having a "subject to financing" condition. This is the biggest purchase of your life and it is important that you are protected!
"In the heat of a bidding war it might be tempting to waive a condition of financing to obtain an edge over (or merely keep up with) other bidders. This isn't always the wisest move - especially if you're prone to emotional bidding.
Even if you're preapproved for a mortgage, it's not guaranteed that you'll receive financing. Only once your lender (and mortgage default insurer, if you're putting down less than a 20% down payment) examines the details of the property (including purchase price, taxes, condo fees, etc.) will you know where you stand in terms of financing.
If you've grossly overpaid for your new home - and blown all previous comparables right out of the water - you might be in trouble. If you had a 5% down payment, and you were preapproved to spend up to $500,000, it might seem that a home listed at $450,000 is within your price range. The problem is, if similar homes in the area have sold for $385,000, the bank may opt to loan you 95% of $385,000, which means you would have to track down the remaining financing elsewhere.
One of the best ways to avoid this scenario is to do your research. Before embarking on a bidding war, ask your real estate agent to research comparable properties in the area to find out what the home's true value is - and make a pact not to go excessively beyond that number. If possible, try to find another way to get a leg up over other bidders - such as offering a quicker closing date."
"In the heat of a bidding war it might be tempting to waive a condition of financing to obtain an edge over (or merely keep up with) other bidders. This isn't always the wisest move - especially if you're prone to emotional bidding.
Even if you're preapproved for a mortgage, it's not guaranteed that you'll receive financing. Only once your lender (and mortgage default insurer, if you're putting down less than a 20% down payment) examines the details of the property (including purchase price, taxes, condo fees, etc.) will you know where you stand in terms of financing.
If you've grossly overpaid for your new home - and blown all previous comparables right out of the water - you might be in trouble. If you had a 5% down payment, and you were preapproved to spend up to $500,000, it might seem that a home listed at $450,000 is within your price range. The problem is, if similar homes in the area have sold for $385,000, the bank may opt to loan you 95% of $385,000, which means you would have to track down the remaining financing elsewhere.
One of the best ways to avoid this scenario is to do your research. Before embarking on a bidding war, ask your real estate agent to research comparable properties in the area to find out what the home's true value is - and make a pact not to go excessively beyond that number. If possible, try to find another way to get a leg up over other bidders - such as offering a quicker closing date."
Natalie,
ReplyDeleteA very good post to ensure buyers understand what may happen.
I find that if they are using a REALTOR® then I can research comparable Solds, check the city to see how much the home is assessed for property taxes, and especially advise them on a good strategy for the situation.
Having you advising them as their Mortgage Broker and a REALTOR® like me for the purchase offer, it puts them in a much better position to make a purchase. Buyers benefit from our experience.
Thanks Natalie.
Ben Officer
http://BenOfficer.ca/