For the past 20 years, the question I get asked at least once per week is “can you approved me for my mortgage before I make an offer to purchase?” More recently, I get asked this question daily.
In a robust real estate market like the one we are experiencing right now, this is definitely a legitimate question to ask. Let’s face it, if you can get approved for your mortgage before you make your offer-to-purchase, “subject-to-finance” is one less condition the seller of the property will need to contemplate when your offer is presented to them.
Regardless of what anybody tells you, a “bank” (which for the purposes of this article includes your mortgage broker, credit unions and the vast majority of alternate lenders in Canada), will not unconditionally approve you for a mortgage before you write your offer and here are a few reasons why:
- The terms of the contract (i.e. the offer to purchase) need to be reviewed by the lender
- Quite often you may not know the exact price of your home until you are actually writing the offer
- The physical condition of the property is unknown without a full review of the fully signed property disclosure statement, an appraisal and possibly a home inspection (and in the case of a strata/condo, AGM minutes, a depreciation report and an engineers report may also be requested)
So, what can you do if the bank and your mortgage broker can only preapprove you for a mortgage ahead of time? Below are a few common strategies I see:
- Make an Unconditional Offer (i.e. an offer with no condition to finance) – This is risky. If there is an issue with the property or real estate contract and the banks says no to the property, you are likely still bound by the real estate contract you signed. This means you stand a good chance of losing your deposit, if you can’t get a mortgage. You may also face a lawsuit. The only time this option may be a good idea is if you already have money in the bank to buy the property outright
- Work with your Realtor to make an offer that’s conditional to financing but has attractive features the seller may prefer (over an unconditional offer). These features can include an offer noticeably higher than the listing price or an offer with a short closing date
- Pay for the Property with Savings and then refinance the property, shortly after taking ownership. The drawback here is many banks will want you to own the property for up to one full year before refinancing. Also, since 2016 a borrow can (in most cases) only borrow up to 80 per cent of the value of the property when refinancing
In a sellers market, buyers are at the mercy of scarcity. One of the best strategies I recommend is tenacity. What this means is “don’t give up easily” and “be consistent” when shopping for your next home. If you are determined to buy now, make shopping for a home your number one priority. When you don’t win in a competitive offer-to-purchase situation, dust yourself off and immediately make an offer on the next suitable property available. The clients I see have the most success are those who buy well below their maximum budget and make offers frequently (as in, once a week, rather than once every six weeks). These clients tend listen to the advice of their realtor and mortgage broker.
We have a housing shortage in Canada currently and until the housing supply catches up to our population growth, real estate scarcity will remain a part of regular life across Canada.
If you want to buy a home in Canada currently be prepared to step in the boxing ring willing to fight a number of rounds in order to win!