In an aggressive market, a subject-free offer might feel like the best option but are you aware of the risks to the buyer if they require financing? As mortgage brokers, we don’t suggest going subject free, but there are steps you can take to minimize the risk.
It is important to understand that there are two parts to a mortgage approval; 1) the borrower and 2) the property (collateral). Risks of approving the borrower can be addressed through a pre-approval. A pre-approval determines whether the borrower qualifies for a loan from the lender, or the maximum amount that the lender would be willing to lend but does not address risk associated with the property. A pre-approval is more than just a quick conversation with a mortgage broker, it means that your client’s financial documents have been reviewed and their credit bureau checked. Your client will have received, in writing, confirmation that they are pre-approved.
Once your client is pre-approved, then only the property poses a risk in not being able to secure financing. To approve the property, lenders want to know that it is marketable and the appraised value is in line with the purchase price. If the property is appraised at a lower value than the purchase price, buyers with smaller down payments may be in a position where they will need to come up with additional funds. This poses a serious risk to clients with little financial wiggle room. Should a lender not find a property marketable for any number of reasons (especially when it comes to stratas with low contingency funds, major capital expenditures, water ingress, poor management, etc.) your client could wind up in a position where they will need to find an alternative lender with a higher interest rate, pay cash, or loose their deposit if they decide to back out of the deal.
In summary, if you are going to move ahead with a subject-free offer, make sure your clients are pre-approved and aware of the risks the property poses. As a small tip, you can always have a mortgage professional review property documents to further reduce the risk. If your clients are ultimately not prepared to make subject free offers, perhaps this isn’t the market for them. For more information, contact us at Primaria Mortgages, email@example.com.