With unprecedented low interest rates and high demand for housing, there is no doubt about it, the real estate market is extremely active and so is the demand for writing an offer without subjects.
Here are the things you need to consider when thinking about a real estate purchase without any subjects.
Firstlly, it is important for you to understand that a “firm and binding pre-approval” doesn’t exist. While we try to manage as many issues as possible in the “pre-approval” stage, there is a whole super-charged level of underwriting that happens only once there is an accepted offer.
Usually the subject to financing is there to protect you while you go through the formal approval process for your mortgage. Here is a behind-the-scenes overview of what your lender may do when your application is live:
- Obtain high ratio mortgage insurance approval through either CMHC, Canada Guaranty, or Sagen (previously Genworth).
- Request an appraisal of the property.
- Review the requested loan amount to ensure it fits within the lender’s sliding scale for the property value and location. Exceptions to maximum loan amounts are frequently requested and granted, but must be escalated for approval by Head Office.
- Watch for zoning/use discrepancies; for example, a residential home located in a C1 (commercial) zoning area. Can a home be rebuilt on the lot in the event of fire?
- Review your supporting documents for Compliance purposes. This is a very large part of the approval process and can include:
- Verbal verification of employment letters. Problem situations can arise when a letter has been written stating that someone has “guaranteed” hours, but in the verbal verification process, a discrepancy surfaces with what the actual hours are.
- Paystubs are reviewed to ensure the hours worked match the contents of the employment letter.
- Tax returns are reviewed for consistency of how income is earned and/or confirmation of rental income from revenue producing properties.
- Divorce/separation agreements reviewed to ensure child support and/or alimony is being correctly calculated into the debt servicing,
- Down payment documents are reviewed to ensure the sources of down payment meet the lender’s guidelines; the things they will look for include: accumulation of savings, sources of larger deposits, timing of when funds were deposited into a Canadian bank account, and if there are gifted funds from family. Deposits that can not be accounted for may jeopardize the approval. If your spouse can’t be on title, but they are providing the down payment, the lender will need to know as some lenders will only accept gifts from spouses on a case by case basis.
- Review of other asset statements such as investments & RRSPs.
- For existing owned properties, review of property tax statements, and mortgage statements to confirm outstanding balances and mortgage payments.
- Review of strata documents to confirm the strata building you are buying in does not have any pending special assessments, and/or that the contingency fund for repairs is adequate. Sometimes the strata documents are required by the mortgage insurer before they make a decision on whether or not to approve the application.
- Review of the purchase contract; what is the Possession in the purchase agreement? Vacant or honoring existing tenancies? This can be a critical point for many lenders. The Property Disclosure Statement (PDS); lenders pay close attention to what has been disclosed in this document. You should be able to obtain a copy of the PDS before you write your offer. Read it carefully to see if there are any items answered “yes” that could make the lender ask for more information.
Lenders that provide mortgage funds make their decisions based on risk assessment. The best and simplest way to understand this, is to put yourself in their shoes. What if you were faced with a decision to lend someone you don’t know $500,000 for the purchase of a home? You would want to know how stable their income is, what it is they do for work, what is their past credit history like, where did the money come from for the down payment, and how structurally sound the home is. If you had to foreclose, how likely would it be that you would get your money back? The supporting documents to base your decision on, would be incredibly important and would have to be authenticated. This, in a nutshell, is why the banks take the steps they do.
A home inspection is there to protect you to find out if there are any structural issues with the home that need to be addressed. The inspection will tell you things like how much life is left in the roof, if there are any visible/obvious foundation issues, required deck repairs, etc. Some Sellers will have a home inspection already done and available for prospective buyers so that the subject to inspection does not have to be included in the purchase agreement.
If you are buying in a strata complex, you will want to see when the insurance certificate for the complex is up for renewal and if there are any known factors that will impact the renewal of the strata’s insurance policy. This is information that your Realtor will be able to assist with. If you are buying a single family home or half duplex, you may want to check with local insurance companies to see what their current policies are. Insurance providers have changed what types of properties they will insure, and so have the associated costs with properties that are deemed to have risk factors. Occupancy has also impacted the availability of insurance; will the property be your primary residence, second home, rental? If you are having difficulty with insurance enquiries for a particular property, sometimes approaching the Seller’s existing insurance provider can help.
Minutes for a minimum of the last 2 years for the: Annual General Meetings, any Special General Meetings, and regular strata meetings, should all be available for you to review, as well as the Depreciation Report, and the Strata Form B. Remember that the lender and/or mortgage insurer may ask for these documents before they issue the approval. If you see anything in these documents that could be perceived as problematic, and you need financing for the purchase, you should perhaps write the offer with a subject to protect yourself.
What do you do if you have an offer without subjects and a problem comes up? Depending on the issue, you may have to work with a different lender, possibly come up with more down payment, bring in a strong co-signer, change the approval to a purchase plus improvements, and/or a combination of all of these.
Available lending is broken down into 2 main channels, “AAA” and Alternate. If there is not a “AAA” lender that will approve your file, you may have to work with an Alternate lender that will provide financing at higher rates and possibly with lender/broker fees. While this is not ideal, ultimately this option might save the day if all other avenues have been exhausted. Alternate financing can be temporary until the risk factors with the original application have been mitigated, ie employment/income issues, improved credit, and/or completed home repairs.
In today’s complex lending environment, it helps to have a dedicated mortgage professional that works for you to have as many bases covered as possible, especially when you are faced with writing an offer without subjects. Working with a mortgage broker can often help because by having access to a variety of different lenders, we can very quickly start the Plan B process in case any issues arise. We are here to help you through the home buying process, and do our best to make it as smooth and efficient as possible.