In Vancouver, purchasing a property these days has become somewhat comparable to a Black Friday event.  A property gets listed, an offer date is set, several buyers line up to view the property (actually some don’t even bother to view as they go straight to the offer stage), and finally offers are placed.  

This is where things get dicey

In normal times, upon submitting an offer a buyer negotiates conditions and a period of time to satisfy the conditions (i.e. mortgage financing, review of property disclosure statement, home inspection, strata/condo documents, appraisal, etc.).  Not these days though.  Buyers are instead submitting offers with very limited conditions, and in a growing number of instances, none at all!  Hence the term, “subject free offer”.

Does a pre-approval mean that you can go subject free?

My short answer to this question is NO.  The term pre-approval is a loosely used term in the mortgage industry and the validity of one varies significantly from broker to broker (or banker to banker).  In most cases, the only guarantee in the “pre-approval” is the interest rate (for a period of up to 4 months).  Oftentimes, a first time home buyer completes a brisk interview with a lender and simultaneously gets suited up with a pre-approval certificate of some sort...and off they go, with a false sense of security, ready to pull  the trigger on what will probably be the largest purchase of their lives.  They may ultimately be impressed with the rate they have just secured, but later on in the formal qualification stage of the mortgage, the interest rate will be the last thing on their minds as all focus shifts to the actual adjudication and underwriting of the live deal.  So to conclude, a mortgage pre-approval is not a pre-paid million dollar credit card, but rather a statement that approves your eligibility to qualify subject to various conditions which are likely not disclosed on the certificate initially provided to you.  I’ll touch a bit more on pre-approvals below, but for a more complete explanation on mortgage pre-approvals and their validity, go back to an episode I did back in March 2019ish Season 2 Episode 4, “Is your mortgage pre-approval legit?”

If all else fails and you must go subject free, how can you best prepare in advance of your subject free offer?

DISCLAIMER: I am not advising anyone to proceed with a subject free offer (especially when you are using mortgage proceeds to purchase the property).  Instead, I will list some main points to ensure you account for as many qualification and eligibility criteria as possible (ahead of your subject free offer).

#1 Suit up with an experienced mortgage broker and complete their version of a pre-approval.  #2 How do you know if you’ve completed a legitimate pre-approval?  Your broker/banker should be requesting the following from you:

• Complete application
• Credit check
• Complete income document verification (pay stubs, employment letter, income tax documents, bank statements).  And if you’re self employed, an abundance of other documents you would never have imagined will be requested
• Complete down payment verification (bank/investment statements that show 90-120 days history of down payment proceeds)
• You will be asked for clarification of various details, then further clarification on details that you have already provided (income, down payment, past employment, specific details about the property, etc)
• Sometimes you will be asked the same question, twice, but in a slightly different way (when this happens, simply answer the question)
• Be patient and answer all the questions asked of you, honestly.  If discrepancies or new information is unravelled throughout your adjudication that wasn’t disclosed earlier on in the application, this could tarnish your credibility with the lender and have a negative effect on your application.  It could also lead to unexpected extraneous condition requests

#3 Back-up Plans

And finally, the if-all-else-fails part of how to prepare for a subject-free-offer (especially if you are purchasing with a mortgage).  Even after completing a formal pre-approval with an experienced mortgage broker, it is important to understand that the pre-approval is still not 100% guaranteed.  And the reason why is simply because all lenders do not officially adjudicate an application until it is submitted with a live offer.  So as is the case with a pre-approval, there is obviously no live deal linked with it - just a hypothetical scenario based on several variables.  And that leads to the final, ultimate safeguard - the back-up plans (in the event things don’t go as expected):

• Back-up Plan #1: having a major financial backstop that can be called upon in the event things don’t go as expected (parents, other liquid assets).  A difference maker could be going from a 10% down payment to 20%, or 20% to 35%.  These are common guideline boost thresholds where guidelines become more favourable or considerably less restrictive
• Back-up Plan #2: having a strong co-signer on stand by if needed.  Rather than a down payment boost, you might just need to borrow someones qualification credibility for a couple of years until you naturally grow in to your qualification down the road
• Back-up Plan #3: having alternative financing options where guidelines are loosened considerably in exchange for a higher interest rate (i.e. instead of today's fully discounted rate, an alternative lender might offer a rate that is 1 to 2% higher for a limited 1 or 2 year term).  These mortgages are also referred to as band-aid mortgages as they are intended to bridge a gap of time in which improvement is expected in a relatively short period of time (1-2 years)
• Back-up Plan #4: a combination of all of the above 

Executive Summary  

Avoid going subject free (especially if a mortgage is involved)...but if you must, proceed with extreme caution and be fully aware of the risks involved.

MarkoMusic: (music produced and performed my Marko)

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