• When is it safe to place a firm offer to purchase a home?

    Short answer: NEVER!!

    Why is it dangerous to place a firm offer to purchase a home?

    First, it is particularly dangerous to place a firm offer on a home when you are putting less than 20% down. Why? Because when you put <20% down, you need to be approved by two institutions, not only one; the lender AND the insurer (CMHC for example). Remember that when you purchase a home and you require a mortgage, the lender not only looks at your personal finances like your credit, income and down payment, but they also look at the property itself to see if it meets their criteria. The insurer does the same; so there are 2 gatekeepers.

    If you put >20% down, you may reduce the gatekeeper to one (the bank), but it is still risky.

    When you get pre-approved, there is no guarantee, commitment, obligation or liability whatsoever for the bank to come through with the financing. In fact, they can change their minds right up until the closing date.

    Why would they change their mind? When they do a pre-approval, they don’t look as deeply into your personal finances as they do after you place an offer and seek an official approval. In some cases, they don’t look at all!! So if they don’t like some detail, like you’re on a contract and not guaranteed employment, guess what? They tear up the pre-approval and send you on your way. This is why it is critical that you have an experienced mortgage broker review your documents.

    Same thing with the property; when you are pre-approved, they can’t look at the property because you still don’t know which property it is yet! You haven’t found it. So you can’t possibly provide every detail. Place an offer on a property with a detail the lender or insurer doesn’t like and guess what? They tear up the pre-approval and send you on your way. What kind of detail could it be? The home may be too small, have electrical problems, be too close to an industrial area, be in a location they don’t like, have too many acres, be zoned commercial….the list is endless! This is again why you should have your broker review the MLS listing of the property in advance.

    What happens if you place a firm offer and can’t get a mortgage? Worst case: you lose your deposit (which commonly ranges from $1000-$20000)! It gets worse. If the seller sells the home for less than what you offered firm, they can sue you for the difference!

    Please consider carefully before making a firm offer no matter how much pressure you may feel! It is tempting to compete but it can be risky!

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