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Getting an appraisal is an important part of buying a home. It tells a lender how much a property is worth, so they can be sure they are financing a mortgage for an appropriate amount. In many cases, homes appraise around a buyer’s purchase price, and sometimes even above it. However, sometimes a home appraisal value is lower than the buyer and seller expected, and now the buyer is left without the financing to cover the total amount of the mortgage they need. If this happens, what are your options? Here’s what you need to know.
First things first…
Let’s begin by saying that even when the appraisal value is lower than you hoped, it doesn’t mean you have to say goodbye to the potential home of your dreams. Often, borrowers think the entire deal hinges on the property appraising for a value that matches their offer, but this isn’t always the case. Assuming the lender didn’t find any outstanding issues with the property that would cause them to not finance the mortgage, like extensive damage, they are likely to agree to finance a mortgage with their appraisal value. Now, you can make the deal work if you can cover the remaining costs between your offer and the mortgage amount you will receive. If you didn’t plan on this expense, it might not be an option to shell out an additional tens of thousands of dollars. However, if you have a savings plan that is prepared for this possibility, providing that bridge yourself means you can likely get a mortgage. Now, we will review some situations you may find yourself in after you have submitted an offer, but the appraisal value is lower than expected.
You have made a firm offer
A firm offer with no conditions attached puts you in a bit of a box. These types of offers have been popular in the seller’s market we saw over the past couple of years, as buyers tried to appeal to sellers by making themselves out to be the least complicated offer. However, once you make a firm offer with no conditions, and that offer is accepted, you are locked into the deal. Even though the appraisal value is light, you are on the hook for covering the remaining expenses to finish the transaction. At this point, you are obligated to provide the financing necessary to purchase the property.
You have been pre-approved
If you have been pre-approved for a mortgage, will this help you if it turns out your appraisal value is too low? In simple terms, no. A pre-approval is not specific to a certain property, but it is specific to you as the borrower. Lenders evaluated your finances, not the exact home you had your eyes on. Just because you have been pre-approved for a mortgage doesn’t mean you can secure the amount you need if the appraisal value is lower than required. Remember, a pre-approval is only an estimate that is subject to change, depending on your finances or the property.
You have mortgage default insurance
Mortgage default insurance comes with high-ratio mortgages, which means the borrower’s down payment is below 20 per cent. In these cases, one of Canada’s three providers of this insurance — CMHC, Sagen, or Canada Guaranty — provides the premium to protect your lender in case you default on your mortgage. This is because the lender is taking on a big chunk of the mortgage financing (up to 95 per cent in some cases). The provider of your insurance might want to see the results of an appraisal, and they will then tell you if they will provide the insurance.
You included this key condition…
In today’s market, it’s becoming more realistic for buyers to include conditions in their offer, as sellers don’t have quite the same monopoly over the market as before. We’re starting to see more supply throughout many markets in Canada, meaning buyers have more choice and sellers aren’t quite as in demand. If your accepted offer includes the condition of needing an appraisal, and the appraisal value is lower than expected, you have the option to walk away from the purchase. This can be a smart condition to include, as it protects you should something go wrong with the appraisal.
Have your plan ready
It’s smart to have a plan prepared in case your appraisal value turns out lower than expected. In most cases, your options will be to either walk away from the deal entirely, try to negotiate a lower purchase price, or find the funds to cover the additional costs on your own. All of these have advantages and disadvantages, and you need to decide what you can afford. That might mean saving up an extra amount of money to pay out of pocket, or having backup properties on your radar in case the deal falls through.
Appraisals are a crucial part of almost every home purchase, and are therefore important to prepare for. If you have any questions about getting a home appraisal, or your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.