Mortgage Fundamentals for Home Purchases
Updated: Feb 13
With interest rates continuing to rise, and housing markets beginning to cool, if you’re considering a home purchase anytime soon, it’s a good idea to revisit some mortgage fundamentals to ensure you’re in the driver’s seat when it’s time to put in an offer. Pre-approvals, home appraisals and financing conditions are three key components to a successful home purchase. So how do they all fit together?
What are the advantages of a pre-approval?
A pre-approval arms you with a few key tools. First, it takes the guesswork out of the equation when you’re home shopping by letting you know the exact amount you will qualify for. You can narrow your search to homes within your budget and avoid the disappointment of falling in love with a home you can’t afford. Second, given that many economists believe that rates will continue to rise, a pre-approval will hold your rate for a period of time (this varies by lender), which shields you from further interest rate increases while you shop. Keep in mind that a pre-approval isn’t a guarantee – so make sure to include that “conditional on financing” in your offer.
How does a home appraisal affect my financing? Unbiased home appraisals are used for several things. Most lenders will require a home appraisal prior to approving a mortgage. They’re used to determine the value of the home which then determines the maximum amount of mortgage you can get. This is important because the seller may be asking for more than the home is worth as far as the lender is concerned and could mean that you’ll need additional funds to close the deal. It may also be required for any refinancing you may be looking to do, as you can only refinance up to 80% of the appraised value of the home. What is a financing condition and why shouldn’t I waive it?
With the white-hot housing market lately, it’s been a popular buyer’s tactic to waive all conditions in an effort to beat competing offers. However, having a financing condition in your offer does several things to protect you during the purchase. First it helps by giving you an additional 3 to 5 days to get your financing in order. Next, it’s important to note that while the pre-approval certainly helps give confidence when purchasing, it’s not a 100% guarantee to a loan being funded for the pre-approved value. Having these extra few days gives the lender time to complete the home appraisal to ensure the home is worth what the seller is asking. The lender may decline based on the results of the home appraisal when contrasted with your offer, or for less obvious reasons, such as the home being outside of their lending area. The financing condition mitigates your risk. Without it, you’re leaving yourself open to liability and may lose your deposit, or even get sued by the seller if funding falls through.
There’s a lot of doom and gloom out there, but the housing market remains one of Canada’s most stable markets and best investments. If you’re looking to make a change, even if it’s not until the fall, I can help you navigate the market to ensure the process goes smoothly, and help you save thousands of dollars doing it. Starting the process early means that I can help protect you against rate increases and discuss potential financing solutions that may increase your buying power. It’s never too soon to get some advice or even chat about your options.