Our friends over at Green Mortgage Team sent us their latest article to share with you. ~Ed
When purchasing a pre-sale, it is crucial to confirm that you
are able to get a mortgage on the property, even if you plan to
assign the unit before closing. Planning ahead is very important
in order to avoid being in a position where you are unable to
complete on your contract and/or risk losing your deposit.
Here are the 5 biggest mistakes people make when purchasing
a pre-sale property:
1. Changes in the real estate market
When the time comes to close on the unit, the bank will typically
ask for an appraisal. If the appraisal is lower than the price you
are paying, you will need additional down payment to make up
that difference. It is important to be prepared with more down
payment funds than you originally expected.
If the value is lower, it will be harder to find a buyer to assign the
unit to for the same price you paid, making it more likely you will
need to complete the purchase yourself.
2. Changes to lending guidelines
Lending guidelines with banks change all the time. Even if you
think you are a strong borrower, you may experience challenges
fitting inside of a bank’s “box”. Regardless of your situation, it is
very important to confirm your ability to qualify for the mortgage.
3. Changes to your financial profile
Buying a pre-sale can come with a lot of risk. Between the
time that you write the offer and the time that you close, your
personal circumstances can change. Changes that can affect
your ability to qualify for the mortgage include starting a new
job, losing your job, purchasing a car or another property,
retiring, applying for credit, etc.
4. Rising interest rates
In the event interest rates rise during the course of the
construction, you may find that you are unable to afford or
to qualify for the mortgage by the time that the construction
is finished. It is important that you understand the worst case
scenario for interest rates and get a long-term rate hold.
5. Restrictions regarding your ability to assign the contract
to another buyer
Whether you intend on assigning the contract or not, it is
important to review the contract and know your options. Many
developers either do not allow assignments or will charge a fee
for an assignment; however, these terms can be negotiated when
you are writing the offer. Always aim for the most flexible terms
possible to allow for more options when closing approaches.
The solution: Obtain an approval with a long-term rate hold.
There is one simple solution that can solve all of these problems:
choose a long-term rate hold. A long-term rate hold offers the
following features:
1. Get fully approved now, which protects your ability to close
regardless of changes to your financial profile. This also
protects you from changes to lending guidelines, to ensure
that you are “grandfathered”. Lenders will typically offer
this if the completion is within 18 months (occasionally up
to 24 months).
2. Most lenders offer a long-term rate hold for 18-24 months.
For longer-term rate holds, they may need to approve the
building itself. Typically, this rate hold is more expensive than
current rates; however, it provides you with a worst case
scenario rate, protecting you in the event rates increase.
Most lenders will allow you to revert to their standard rates
at closing if they are lower, making a long-term rate hold
your best option.
3. Sometimes lenders will get a “blanket appraisal” on the
building and your unit, which protects you from changes
in valuation between the date you write the offer and the
closing date. That way if the value drops, you will still be
able to use the value from the date that you wrote the offer
(and you will not require more down payment funds to
complete).
Overall, even if you plan on assigning your unit, it is important to
have a contingency plan. If you are a real estate investor, make
sure this property makes sense in the event that you have to
close. Does it cashflow? Does it fit your portfolio and your game
plan? Always visualize ahead of time and consider what your
situation will look like if you have to complete the purchase.
If you have a pre-sale under contract or you are considering a
pre-sale, make sure you have a long-term rate hold and approval
in place. The Green Mortgage Team has access to a number of
options for long-term rate holds to help protect you as a buyer.
To review your options, contact us today at Green Mortgage Team.
