Recently I was talking to a bank manager friend of mine ‘Jack’ about this current crazy housing market and it presents a picture that is at once dangerous and lacking anything that makes sense!

Jack is seeing on an almost daily basis, clients who purchased properties weeks or even months ago and are having trouble closing. Seemingly they had bought their homes at the peak of the market in  the highest price range due to a combination of enthusiasm and fear. Afraid of being shut out of the housing market, these are the buyers, millennials as well as gen Xers, who have bid waaaaaaay over the asking price (in my Durham neighbourhood as much as $150 -$200,000 over!), and have entered the transaction without any waivers, either of inspection or financing, fearful of losing the deal if they impose any restrictions on the seller.

In terms of financing problems, many buyers seem to have confused the terms ‘Pre-qualified’ with ‘pre-approved’.

Getting pre-qualified is the initial step in the mortgage process, and it’s generally fairly simple. You supply a bank or lender with your overall financial picture, including your debt, income and assets. After evaluating this information, a lender can give you an idea of the mortgage amount for which you qualify. Pre-qualification can be done over the phone or on the internet, and there is usually no cost involved. Loan pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home.

Getting pre-approved is the next step, and it is much more involved. You’ll complete an official mortgage application, then supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. (Typically at this stage, you may not have found a house yet, so any reference to “property” on the application will be left blank). From this, the lender can tell you the specific mortgage amount for which you are approved.With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. Obviously, this puts you at an advantage when dealing with a potential seller, as he or she will know you’re one step closer to obtaining an actual mortgage.
The other advantage of completing both of these steps – pre-qualification and pre-approval – before you start to look for a home is that you’ll know in advance how much you can afford. This way, you don’t waste time with guessing or looking at properties that are beyond your means.

Unfortunately, many people have confused the two terms, and with only a ‘pre-qualified’ designation have proceeded to put in an offer on a property, complete with cash deposit, only to discover on closing day, to their horror, that the deal is about to collapse as there has been no Commitment issued by a lender. Many have even had to resort, in desperation, to family loans or other short-term borrowing (usually at usurious interest rates) in order to close the deal.

One of the major banks even has a commercial running, where a client is told, within the span of ten or fifteen minutes that she and her husband have been ‘pre-qualified’ for a certain amount, a misleading statement that naive buyers could be using as a form of quasi-approval for purchasing a property.

Home appraisals, a pre-requisite to getting the deal funded, are often coming in lower than the offer they made, usually due to the inflated and unrealistic offer for the property. An appraiser must look after the interests of the lender, since if there is a subsequent default on the mortgage, the lender has to be able to issue ‘power of sale’ and know that their investment will be re-couped.

The other issue that Jack relates with every conversation about a failed deal is the lack of a home inspection condition in the offer to purchase, and some buyers are now finding problems with their homes.

Also, another problem arises where some have not been able to sell the home they are currently in and now will have to close on the new one while still owning the existing home. So now they are faced with the possibility of having to secure ‘bridge financing, which can be both costly and difficult to obtain. The result of this will be that  some would-be buyers are going to have to walk away from their deals and face a court action for failure to live up to the terms of the contract that was signed so hastily, not a pleasant prospect.

Many of these unfortunate happenings could have been avoided by spending an hour or so with a licenced, qualified Mortgage Agent, who could have steered these hapless home-buyers into a more realistic scenario that would match both their goals and their ability to afford them. I would welcome the opportunity to help you achieve your home ownership targets while mitigating the downside risk. Please don’t hesitate to call me – 416-315-1787.