IS A PRE-APPROVAL ENOUGH?
Our market has definitely taken yet another shift, we’re back in the day of multiple offers, and by multiple I don’t just mean a few. I’m talking about 30-40-70 at a time!
With so much activity, I can understand why buyers may be encouraged to removed any conditions they may have in their offer. Sadly, the reality is if there are a handful of offers and there are some with conditions and those without, the firm offers will take priority. But should you remove that condition of financing, do you actually understand what it is that you’re doing??
Many people say “I’ve been pre-approved, I’m fine”. But please understand, that being pre-approved doesn’t necessarily mean that you’ll get all that money to close on this property!
Pre-Approval. Do I need it?
Yes, being pre-approved is an extremely important step that all buyers should do! You need to have a good understanding that based on your household income or those that will be on the mortgage, what is it that you can afford. Use that information that to help focus your home search and set your criteria.
Few things to consider…
Some agents list low to get those multiple offers and drive up the price! This is a strategy. Buyers need to be realistic of what price point they should be searching in and a good agent needs to explain this.
Just because it’s listed low, doesn’t mean that will be what the selling price is! You must look at what comparable homes have sold for recently. You’ll be shocked. Some are listed so low that they sell for $400,000 over!
The lack of inventory is also driving the activity these day. People have been locked away for the past year. Be that a rental, condo or first time buyer home. Everyone wants more space and everyone wants it now. So this is bringing the buyers out in droves.
So let’s talk this through…
You’ve gone and gotten pre-approved. That’s great. Let’s say your lender has said that you’re pre-approved for a $1,000,000 mortgage. You start your search. After months of searching you finally found “the one”. Perfect!
This home also happens to be “the one” for about 20 other buyers. So your agent starts to discuss the specifics of your offer. How can you make it as interesting to the sellers as possible. Your conditions come into conversation. As I’ve stated above, the reality is that seller’s want a firm offer. They don’t want to have to worry about buyers fulfilling their conditions. So a firm offer with deposit in hand will take the lead. (Now the selling agent should also be vetting the buyer, and that should be a key factor too, however sadly, this isn’t always the case.)
So your agent says “let’s remove your financing condition”. And you think to yourself, “Sure, I’ve been pre-approved, let’s do it”.
You go put a bid in on the house, you offer $1,000,000. Firm offer. Boom! Congratulations, you’ve just bought a house. (Clearly not in Toronto).
So you contact your lender and let them know you’ve bought a home. Finally! How exciting.
They arrange for an appraisal of the property, but guess what…they say it’s only worth $850,000 and that’s all that they will lend you! F@$K!!!
What do you do now??? What does this mean??? Essentially it means that you’re $150,000 short on the house and your closing day is fast approaching!
Can you back out of the deal? Nope. You’re in a legally binding agreement. If you explain that you can’t get the full mortgage and need to walk away, what could happen?? Well to start, you could loose your deposit…or worse you could be in an even nastier legal battle where the sellers try to get even more $$$ out of you!
Neither option is good! Trust me!!!
So, is a pre-approval enough to waive your financing condition? Only you will know. You’re aware of your finances. If you’re a first time home buyer and looking towards the top of your budget with no secret funds stashed away, maybe it’s not! If you’re downsizing and have a nice little pillow of savings, then maybe it is. Do you have a property to sell in order to move on this one? At times your pre-approval can factor this in! Be sure there’s no stipulations and if there are, what does that mean? Can you get bridge financing? At what cost?
There’s so many factors to consider, be sure you have these conversations with your realtor, lender and lawyer!
Multiple offers suck. Trust me. I get it! It can take months/years to find the right space and then being up against a handful of other buyers makes it even harder.
All you can do is put your best foot forward and what that means for each buyer will be different. Just make sure you understand what it is that your saying when you put that foot forward. And if that financing condition has a part to play, make sure you understand EXACTLY what that means.
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