Sometimes your client’s new home purchase collapses because the lender refuses to fund the mortgage it approved prior to the home’s construction. The buyer loses the new house and often loses a significant deposit.
Why are lenders changing their minds?
Builders often require a mortgage broker to sign a form indicating there is an “unconditional mortgage approval” for the buyer before proceeding with the sale and construction of a new home. However, many lenders only give borrowers conditional approval, and even after waiving conditions, the lender may carry out additional due diligence. A lot can change in a borrower’s circumstances in the time between getting a mortgage commitment and taking possession of a completed property. If the lender determines the borrower no longer qualifies for the mortgage they approved months earlier, they may refuse to fund the mortgage.
As a mortgage broker, there are things you can do to protect yourselves and your clients.
Changes in your borrower’s circumstances
You all know that terms such as “Pre-approval” or “Approval in Principle” or “Conditional approval” mean a lender will likely fund the mortgage if all of the assumptions the lender made are true and remain true at the time of funding.
A loan that is “pre-approved” or “approved in principle” is not the same as loan that is approved. If there are any material changes to the borrower’s circumstance between the time of purchase and the construction of the property, the lender reserves the right to withhold funding. This is usually the case, but the issue is magnified when, with new construction, it’s often a full year or more before the lender actually advances the funds for the mortgage.
Subject to valuation
“Subject to valuation” is another typical requirement attached to a conditional loan approval with builders. Markets change over time, and during a lengthy construction period there may be changes to the property specifications. Sometimes the valuation will show your borrower paid or agreed to pay too much for the property. The lender or insurer may require an appraisal to determine if the property value is adequate security for the proposed financing.
Educating your borrowers
Borrower(s) must understand the risks of waiving their financing condition, particularly when dealing with new constructions and a long possession date. If they are unable to get their mortgage funded on possession day, they could forfeit their deposit, and the builder may take legal action.
RECA recommends using a disclosure form with borrowers that explains the risks of waiving their financing condition. Such a formal could include a checklist of the discussion points between you and the borrower, statements about income, job stability, added debt, missed payments, change in market value, upgrading building specifications (cost doesn’t always equal value), and so on.
Borrowers typically choose to proceed with the transaction, but it is important that you educate the borrower so they understand that all of their information, including the value of the property, must meet lender requirements at the time of funding, and that there are consequences if that is not the case.