Tuesday, March 20, 2012

An important reminder: Don’t assume a pre-approval is set-in-stone

Bidding wars have become commonplace in hot markets across the country - and so have "clean" offers, or those that are free from all conditions. While forgoing something like an inspection is risky enough, at least buyers know what they're getting into. The most dangerous waived condition, in our opinion, is the condition of financing - primarily because many buyers assume that they're safe with merely a preapproval.

While a preapproval provides you with a rough estimate of how much money a bank would be willing to loan you, it's based solely on your income and level of debt. Since preapprovals are usually requested before a property is bid upon, the bank has no way of taking the property into account - so the financing offer isn't etched in stone.
A bank wants to know that the money it's investing is tied to a good property - one that is being purchased for fair market value and is in good condition. If you get caught up in a bidding war and end up submitting a condition-free offer, it's quite possible that the bank may not come through with the financing it tentatively promised - even if the price falls within the range of your preapproval. After all, if the bank thinks you drastically overpaid for the property, it's not going to give you a mortgage that might be worth more than the value of the home.

In addition, mortgage underwriting departments don’t review your supporting documentation (employment letters, paystubs, down payment confirmation) until you have written an offer on a home. In addition, banks will not submit your file to the mortgage insurer (CMHC, Genworth etc) until you have an offer on the table. If there are any issues with your paperwork or the mortgage insurer declines your file you may not get the mortgage.

That's why it's so important to include that condition of financing in your offer - or at least consult with your mortgage agent before opting to leave it out. While bidding wars are stressful experiences to say the least - especially if you've been through a few of them - so is being locked into a home offer you can't afford. Not only will it leave you scrambling for financing at the last minute (and potentially paying a way higher interest rate than you anticipated) but, if you can't find any financing, you could end up losing your deposit and potentially being subject to a law suit.

In your opinion, which scenario's worse?






-Axiom Mortgage Partners

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