With the increased demand and lack of supply in the Toronto market, we are seeing more properties sell for over the list price with multiple offers. The Spring market is always the most active in real estate and many Sellers are elated when they receive a much higher price. But there’s a problem when too many uneducated Buyers offer way over the list price then find out after their Lenders appraisal falls short. This can sometimes kill the deal!
The issue is that some Buyers tend to believe that if they’re pre-approved for a Mortgage they can spend up to that pre-approval amount on any property and it’ll be smooth sailing. That is not the case! Just because you’ve been pre-approved for up to $400,000 doesn’t mean you’re safe to spend $400,000. The amount you’ve been pre-approved for and what the property value is are different things.
The following steps are involved when getting a Mortgage:
1. Prequalification Process
This is an initial review of your financial situation in order for the Lender to prequalify you for a certain size mortgage loan. Basically, this is a way for the Lender to decide whether or not to move forward. If this preliminary review goes well, you move one step closer to mortgage approval. You want to do this before you start your home search so you can ensure you’re on the right track financially and you get an idea of what you can afford.
2. Mortgage Application & Pre-Approval
Based on the prequalification process, the Lender will have a general idea whether or not you’re a good candidate for a mortgage loan. If they feel you are a candidate, you will likely move on to the mortgage application itself. This is where you will have to make a final decision on the type of mortgage loan you want, and also lock in an interest rate for the loan. Once you are approved, the lender will give you a letter of commitment stating how much money they are willing to loan you for a home purchase for a period of time. With a pre-approval in hand you can start your shopping.
3. Offer Acceptance
Once you’ve submitted an offer on a property to purchase, your accepted offer documents will go to the Lender for approval and an appraisal of the property will need to be done to verify the value.
4. Property Appraisal
One of the major steps in the mortgage approval process is the property appraisal. This is where the lender evaluates the property value in order to make sure the home is worth the amount you have agreed to pay for it. If the Lender appraises the property for less than you paid, you are responsible for making up the difference or else the deal does not proceed.
5. Mortgage Approval
If the appraisal matches the price you offered for the home, you will receive final Mortgage approval and your deal can be processed. Next is the closing process where you will have to pay all remaining fees and costs. This is also where you get the keys to your new home!
* The moral of the story is that if you’ve been pre-approved for a Mortgage, you need to be careful of what price you’re offering on a property. If it is higher than the appraised value and you can’t afford to pay the difference, the deal will die. As your Realtor, I will always review the comparable sales of every home you wish to purchase to ensure you know what its market value is so you don’t overpay. Along with your Mortgage Professional, my job is to educate you to make smart decisions when purchasing a home so there are no surprises.