Stay Grounded! Know What You Can Afford

When you are involved in buying a property and there are multiple offers, it’s best to keep your feet planted on the ground because the bank may say “no deal”!

This does happen, especially now in the US, where banks were badly burned in the bubble of 2006–2007. Back in those crazy days, wildly inflated home appraisal values were routinely submitted to the banks, so that virtually any breathing applicant would qualify for a mortgage. The consequences were disastrous.

But even in normal, stable markets like Canada’s, a large asking-selling discrepancy could spell trouble for the purchaser. Since institutional lenders (banks) lend a percentage of the appraised value of the home, a low appraisal can make it hard or impossible for the purchaser to put together the financing.

Assume you buy a home for $400,000 and put 20 per cent ($80,000) down. You need a mortgage of $320,000 to complete the purchase. But the home appraisal comes in at just $380,000. Based on this appraisal, the bank will give you a mortgage of just $304,000. You have to come up with an extra $16,000.

There are several ways to deal with this situation. One is to come up with the money you are short. You can do this by borrowing it from someone other than the primary lender (the bank), though the bank will want to know about this. You can renegotiate the price with the seller (not likely). You can walk away. For this last option to work, you need to have made the purchase conditional on being able to secure financing; otherwise, you will lose your deposit.

Not every house or condo requires an appraisal. The Bank of Montreal, for example, requires home appraisals only when the purchaser’s down payment is less than 35 per cent of the purchase price. This is quite strict, however, given that the minimum down payment required is just 5 per cent.

Canada Mortgage and Housing Corporation explains that a professional appraisal “may be required” if the lender wants a more “in-depth” assessment of the property than has been provided via the standard property information worksheet.