The house you just bought firm doesn't appraise... Now what?!
If you thought that buying in 2017 was difficult, 2020 and now the beginning of 2021 is proving to be better/worse depending on which side of the deal you’re on.
When you are in the beginning stages of the home buying process you start with your pre-approval, which helps you understand the maximum purchase amount you can qualify for. It takes into account your current debt, income, job stability and closing cost savings including the down payment. Once you have that all put together (plus the supporting paperwork needed to verify the info and your credit check) you will come up with a purchase strategy that is dependant upon the amount available for your down payment.
If you plan on putting down 20% or more of the purchase price you don’t need mortgage insurance but if you are putting down between 5 and 19%, you will need that insurance in place for the bank. The two most common insurers are Sagen (formerly Genworth) and CMHC. In basic terms, they want to be sure that if you default and they need to take the house (asset) back that they have room to sell it and recoup the amount you owe them to pay out your mortgage against the property.
So here is the problem… Value.
A home’s value is different depending on who you ask. It has an emotional value in a market like this to buyer and seller, which as a result has a market value based on the willingness of those parties to buy/sell and finally it has an appraised value for the bank. Same house, 3 different opinions of value.
When these numbers are “out of whack” for lack of a better way to put it, the buyer needs to have backup funds. Because this is how it works…
In our market almost everything under $600,000 finds itself in competition. That means that the strategy is to try and present an offer that will appeal the most to a Seller. Closing date, conditions, inclusions/exclusions, offer price and deposit are the way to a Seller’s heart if we’re being honest. The “cleanest” offer wins and the reality is that many offers are coming in firm with no conditions - no inspection, no financing, just a take it and it’s sold kind of deal. Which is awesome until it isn’t.
Appraisal.
That word can make your blood run cold if you are under-prepared for the impact that an appraisal can have on your financing. Because if you remember the varied opinions of value, the bank may not look at it the way you do.
Let’s look at a fictional example. Listed for $385,000 is a little bungalow that we know based on the recent comparable sales is likely going to sell for around $450,000 and has enough data for the appraisal to support that. Problem is you REALLLLYYY want it and are willing to pay $475,000. You have a pre-approval in place for 5% down and $485,000. So you want to throw that $475k at them, you’re within your range right? BUT the appraisal comes back at the expected $450k. You are now personally on the hook for the extra $25,000. You can’t borrow it from the bank because it will mess with your debt ratio. So unless you can crack open some investments or have a friend or relative in a position to throw down the extra, you are NOT going to get your mortgage. And if you went in firm, you are in a whole other legal battle because it’s not the Seller’s problem.
Which is why when we take our Buyers “shopping” we never go looking at price points they are “qualified” for, we look at recent sales and look far enough below their number that they can afford to compete at above asking expectations.
Honest communication and a strategy are both incredibly important. Have questions about this messy market? We’re here for you.