With all the pent-up demand for real estate, and with mortgage rates at record lows, the Greater Toronto real estate market is hot. We have been getting more requests for pre-approvals than any other time in the past. It seems as though all of a sudden, everyone wants to buy a home.
With all this demand, buyer competition can be fierce, and multiple offers are becoming more intense. The pandemic had created a window of opportunity to buy property when demand was lower, but as consumer confidence builds, those who were waiting on the side lines are now looking to buy.
When you are faced with so much buyer competition, sellers are not only going to be looking at the highest offers, but they are going to be looking at the conditions. Put yourself in the shoes of a seller for a moment. Let’s say you have the following offers:
$925,000 with a finance condition
$920,000 with a Finance condition
$915,000 with no conditions
Which one would you accept?
While the higher offers will be the first ones looked at by the seller, they may be more inclined to accept the lower offer without the conditions.
Because it’s a guarantee. A condition gives the buyer a chance to back out at any time. It doesn’t even need to be for the reason why the condition was put in there in the first place. Generally it is, but there are some situations where a buyer can simply change their mind. It can be pretty easy for them to say that their financing didn’t come through, and in most cases, they are not required to show any proof of the decline.
This is why a condition free offer is so attractive to sellers when they have multiple offers to choose from.
Here’s What You Need To Know About Putting In An Offer Without Conditions
Regardless of how solid you think your financing is, there is always risk involved. Mortgages have many moving parts, and there are many things that can go wrong. Here are just a few:
- The appraisal could come in below the purchase price
- The property itself could be declined
- Your income may not be accepted by the lender
- Down payment source rejected
- Additional debt not reporting on credit bureau
- Credit bureau surprises
This list can go on and on, and can literally be hundreds of things. While each of the above points could be an entire blog on their own, I’ll touch on each of the above for now.
Appraisal Comes In Low
In more than 99% of real estate purchases, the appraisal comes in at the purchase price. However, there is that 1% of the time where the appraisal falls short. Should this be the case, then you would need to cover the difference between the appraised value and the purchase price. This is most risky for buyers purchasing with 5% or 20% down payment. If you are purchasing with 5% down, then the buyer may not have the additional funds to cover the difference. With 20% down, the buyer could always put down less and pay the CMHC insurance premium, however this could lead to qualification issues in cases where the debt to income ratios were tight, and the buyer needed a 30 year amortization to qualify. (Maximum amortization on insured mortgages is 25 years).
The property gets declined
You could be the most qualified buyer in Canada. It doesn’t matter how much you make, how low your debt to income ratio is, or how much you have in the bank. In some cases, it can be the property itself that gets declined. Here are some reasons that could lead to your dream home being rejected by mortgage lenders:
- Kitec plumming
- Knob and tube wiring
- Property is a fixer upper (tear down, not livable, not safe, structural issues, etc)
- Undisclosed stigma (former grow-op, however this would have to be disclosed by the seller)
- Low reserve fund or issues with status certificate (condos)
Income not accepted
As long as you have salaried, stable and permanent income, then this is generally not an area for concern. There are however some situations that can pop up that can create an issue with the lender:
- contract employment with a set end date
- recent change to self-employment (even if you are still working with the same company)
- income reduction
- new employment
These are just a few situations that can arise, and the list can go on.
Down payment source gets rejected
Lenders will ask for a 90 day history of bank or investment statements to show the natural accumulation of down payment (if 100% of down payment is coming from the sale of a property, then this may not be required). If there are any larger, or unusual deposits, then the lender will need to see the source of those deposits. If transferred from another account, then the full 90 day history of the source account will also be required. The lender will need to see the full paper trail. There are however times when other deposits pop up that may not be accepted by the lender. Here are some examples:
- Gifts from friends
- Repayment of loans from friends
- Cash deposits
- Gifts from non-immediate family members (cousins)
- Gifts from sanctioned countries
There may be solutions for some of the above, and they will not necessarily result in your mortgage being declined, however every situation is different, and there are some that will be a hard stop for many lenders.
Additional debt not reporting on credit bureau
A bank or broker will see a complete list of your debts once they pull your credit bureau. The vast majority of the time, all your debts will listed. But this is not always the case. It’s possible that there could be a loan that is not reporting on your Equifax credit bureau, but could be reporting on your Transunion (for example). Brokers will pull a credit bureau from Equifax in most cases. Some lenders will then pull your Transunion to ensure everything matches up. This is where they could find out about an additional debt. Or the payment for it could show up in the bank statements. Any additional debt not reporting on your credit bureau will change your debt to income ratio, and may negatively influence the amount you thought you qualified for.
Credit bureau surprises
You may think you have solid credit, and it’s likely that you do, however there are times when surprises can pop up on your credit bureau. It could be a new collection just registered from an old cell phone bill that you were disputing and thought was settled. A credit card that you thought was closed and paid off, but had a small, accrued interest balance that was never paid. Or it could be fraudulent activity. In most cases, if you think you have sparkling credit, then you probably do. But there are times when these surprises can pop up, which can result in mortgage qualification issues.
How To Minimize Your Risk In Putting In a Firm Offer
Make sure your bank or broker covers the bases. Before putting in a firm offer, they should be requesting a full document package from you up front, and should take the time to fully scrutinize your documents to ensure there are no red flags. That said, there are always things that can pop up that were not expected, or sometimes things can be missed due to human error. As long as everything is reviewed in advance by a solid and experienced mortgage professional, then risk will be minimal.
Regardless of how much effort your mortgage professional puts into your pre-qualification, there is always risk involved. Putting in a firm offer is never 100% risk free, and is always done at your own risk.
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The Paul Meredith Team will be donating $250 to local food banks for every mortgage we fund from April 30-July 31st, 2020.
With well over one million Canadians now out of work, the food banks need our help more than ever.
For this period in 2019, we closed 93 mortgages, which would have meant a donation of $23,250! We want to exceed this number this year! Regardless of whether you are purchasing, refinancing, or have a mortgage coming up for renewal, all closed mortgages closed through the Paul Meredith Team will add to the total donated.