Toronto's real estate spring market is about to get started or some might argue it has already begun with a semi-detached in The Junction selling for $210,000 over asking with 32 offers, yes 32 offers! The spring real estate market is the hot season where most transactions are made since many buy in the spring with closings in the summer before schools start in September. One thing you will hear many times from real estate agents, mortgage brokers and bankers is "Get Pre-Approved". I dislike mortgage pre-approvals for the following reasons:
1. Pre-Approvals Underwriting
Pre-approvals are underwritten conservatively relative to an actual deal. The Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS) requirement for pre-approvals is 32/40, however real deals can go up to 39/44. This means a pre-approval purchase value will be lower than what a buyer can qualify for.
2. Interest Rate Variations
This is where things get really tricky. Some lenders add a premium (safety buffer) to pre-approvals, typically 0.1%, since they do not know the exact cost of funding off the bond market until there is a deal with a closing date. Furthermore, lenders have different rates based on:
- Closings within 30 days, 45 days or 120 days
- Deals that are insured (less than 20% downpayment)
- Features built into the mortgage (fully loaded vs no frills mortgage)
- Occupancy of property: owner occupied or rental
- Some lenders won't do pre-approvals
What I do with all my buyer clients is get them pre-qualified per the following steps:
- Complete financial analysis and mortgage application
- Establish a monthly cash flow budget
- Get a rate hold in a rising interest rate environment
- When they see a property they want to put an offer on, I complete the mortgage qualification analysis based on the property details to establish a maximum price for a bidding war scenario
The fourth step is critical since my clients are emotionally ready to walk away from a property after they have established the maximum price they are willing to pay. So far, they have been quite successful.
In conclusion, pre-approvals are nothing more than a rate hold which is a good thing to obtain in a rising interest rate environment which doesn't look like is happening anytime soon.
If you are looking to dive into Toronto's hot real estate market and win a bidding war, please contact Nawar.