Purchasing a house? Cash offers and why they are so risky.
May 15, 2019 | Posted by: Rachelle Czartorynskyj
If you are shopping for a house there is a good chance you’ll be competing with other buyers, potentially buyers that put in cash offers. Something to keep in mind is that those Cash buyers are people who have accumulated equity or savings that enables them to pay cash for the property.
If you are relying on a mortgage to buy a home and your realtor recommends you go in with a cash offer due to competition offers, this should definitely put up red flags. As a Mortgage Broker I am seeing this become more common every day in our current market.
Buying a home is not only an emotional experience but one of the important financial decisions you will ever make. Even in my personal experiences in buying real estate, there comes a point where common sense has to take over no matter how much you love the property. Going in with a cash offer or being asked by your realtor to do so when you require financing puts you and the realtor at risk of legal repercussion and losing your deposit. Even if you have a pre-approval from a Bank, Credit Union of Broker Lender, there are many factors that are taken into consideration once you actually make your offer and the bank will ask for documents to support your approval. Once your offer is accepted and it comes time to apply for the Mortgage Approval, the Banks consider many aspects. There will be certain conditions that must be met before you get your final approval which include income confirmation. You must remember if anything changes in your situation from the time of approval to the time of closing this could affect your ability to still qualify for the mortgage and the mortgage could be cancelled.
Other considerations are:
Debt Servicing: Affordability calculations based on the “Stress Test” to ensure you can afford the property: mortgage payment, property taxes etc. in addition to your existing debt obligations.
Credit History and Score: Must meet requirements
- Property Value and condition: if insured (less than 20% down payment) the insurer will need to support the value of the home or you may end up having to put more money down. The same goes if you are putting more than a 20% down payment and the mortgage is not insured, the mortgage company will require an appraisal to me done. Private sales are also more of a risk because more often than not they are overpriced. And say the property has some deficiency’s or deferred maintenance that the appraisal brings to light, depending on the severity the mortgage company could say they won’t lend on this property or insist on a hold back of funds until certain maintenance is completed. Some properties types are also harder to finance, such a heritage and if the property is older and has knob and tube wiring, asbestos or old wiring the bank will insist these are fixed prior or within a certain amount of days after closing. Insurance also can be difficult to get which is a requirement of the bank.
When I am working with a buyer, if the buyer has more than 20% down (Conventional mortgage where they don’t require approval by an insurer CMHC, Genworth or CG) there is a little more flexibility generally for putting in less conditions. At 20% down or more I have access to many “alternate lenders” that will consider to finance the property, but at a higher rate with fees. However there is still risk, because should things go sideways with the bank, in example: your 3% rate with no fees has now turned into 8-10% with fees.
Putting in a financing condition clause in your offer to purchase is always the best and most sensible thing to do to protect youself even though this is a disadvantage in a multiple offer situation. I also recommend a condition for a home inspection as there are a lot of things that could be found by the inspector that would affect the price you are offering and ultimately your decision to purchase the home. Once the bank has signed off and approved all your documents and you are happy with what the home inspection report, and then only then is it advised to waive your conditions and firm up your offer.
One of the first things you should do before looking for a home is to get a “Real Pre-approval” from an experienced Mortgage Broker. As a Mortgage Broker I look at everything in depth, work the figures so you know exactly how much you will qualify, how much you need as a down payment and the best part is even if your credit is not perfect, I have over 80 Lenders that I work with to find you the best rates and solution no matter what your situation. From Bank Mortgages to Private Funds. As an experienced broker with over 16 years in the industry I have worked with almost every situation imaginable and helped hundreds of clients Canada-wide.
Although Pre-approvals are never a guarantee of Approval, when working with a Broker you can have peace of mind that they have been diligent in reviewing your situation and will position your application for the best chances of approval. You can call me at 519-801-9889 or fill out my online application https://www.mortgageweb.ca/en-CA/rachelle/Apply for a super-fast service.
After you are pre-approved for a mortgage you are ready to start shopping for a home. The best ways to ensure you are protected is to work with an experienced Real Estate Broker. When a client works with me, if they are not already working with a Real Estate Salesperson I provide them with a Realtor from my Preferred Network. In the event you find yourself in a multiple offer situation or not, an experienced Broker can offer you invaluable advice and position your offer for the best possible chances for acceptance. The really neat part is that Realtors can sign you up for Email MLS Listings and often know of properties that you may be interested in before they hit the market.
It would be a pleasure to help you navigate through this process and show you how my many years of experience in Real Estate and the Mortgage Industry can be beneficial to you :)