This article is for general information only and is not financial, mortgage, legal or tax advice. Buyers should consult their financial planner, mortgage broker or bank, and lawyer or notary regarding their specific circumstances and transaction.
You have been approved for a mortgage. Your offer is accepted. Everything looks good. Then the appraisal comes back at $950,000 — but you agreed to pay $1,000,000.
Now there is a $50,000 gap.
Does that mean the deal is over? Not necessarily. But it can create a financing problem that needs to be addressed quickly. This is one reason I believe the buyer relationship should begin with a discovery meeting before we start looking at homes. The offer price is only half the equation. The other half is whether your financing can support the price you agreed to pay.
When a lender approves a mortgage, it is essentially asking two questions.
First: Can you repay the mortgage?
The lender looks at your income, debts, credit history, down payment and other financial information to determine whether you can service the mortgage. A pre-approval helps establish how much you may be able to borrow, but it does not guarantee financing for a specific property.
The lender also needs to be comfortable with the property securing the mortgage. If you stop making payments and the lender eventually has to rely on the property as security, its value matters. That is where the appraisal comes in.
You may be financially capable of carrying an $800,000 mortgage. But if the property is valued lower than expected, the lender may not be prepared to advance the full amount you need.
The issue isn't necessarily whether you can afford the mortgage.
The issue is that the lender may determine that the property does not provide enough security to support the amount you want to borrow. Depending on the mortgage, lender and your down payment, you may need to bring additional cash to the transaction. That's the appraisal gap. And it can happen even when you have already been pre-approved.
There isn't necessarily anything wrong with the property. The appraiser may reach a different conclusion about market value based on:
Recent comparable sales
Property condition
Renovations and their contribution to value
Location
Unusual characteristics
Limited comparable properties
Changes in the market
In some cases, the buyer simply agreed to pay more than the available market evidence supports. That doesn't automatically make it a bad purchase. But it can change the financing.
Bring additional cash.
If you have the liquidity, you may choose to increase your down payment and proceed.
Review the appraisal and financing.
Your mortgage professional or bank can review the situation and determine whether another financing structure or lender may be appropriate. Co-signer is an option sometimes.
Consider Vendor Take-Back financing.
In some circumstances, the seller may be willing to finance part of the purchase price. This is not common or automatically available and requires the seller's agreement and appropriate legal and financial advice.
Consider whether renovation financing can be part of the overall structure.
For some properties, approved renovation costs may be incorporated into a financing strategy, depending on the lender and circumstances. I wrote more about this in How to Pay for Renovations Before Selling (and After Buying) in Vancouver.
Reconsider the purchase.
If the numbers no longer make sense, reconsidering the transaction may be the right decision. Whether you can do that depends on the terms of your contract and the circumstances.
This is one reason I don't believe buyers should start their home search by simply sending me listings they like. Before we shop, we should understand your financial parameters. Not just:
But:
How much are you comfortable spending, how much cash do you want to retain, and how much flexibility do you have if something unexpected happens? That conversation can change how we approach the entire search. It can also prevent a problem from becoming a crisis.
I am not your mortgage broker, financial planner or lawyer. Those professionals have an important role and should be consulted on matters within their expertise as part of your team.
My role is the real-estate side of the puzzle.
Over the years, I have built relationships with mortgage brokers and other professionals who can help explore different solutions when a problem arises.
My job is to understand the issue, bring the right people into the conversation and help navigate the real-estate side of the transaction toward completion.
Sometimes the problem is obvious.
Sometimes it is a problem the buyer didn't know they had until it surfaced.
Proactive service means looking for those problems before they become surprises.
White-glove service means being there to help solve them when they do.
BC Assessment and a mortgage appraisal serve different purposes. Your BC Assessment value should not be assumed to be the value a lender will use when assessing a property for financing. The lender's valuation is part of its own assessment of the property and the risk associated with the mortgage. BCFSA materials recognize appraisal or other objective evidence of value in determining loan-to-value.
Getting mortgage approval isn't the finish line. The lender needs to be comfortable with you as the borrower and the property as its security. That's why the offer price is only half the equation. The other half is whether the financing can support it.
You have been approved for a mortgage. Your offer is accepted. Everything looks good. Then the appraisal comes back at $950,000 — but you agreed to pay $1,000,000.
Now there is a $50,000 gap.
Does that mean the deal is over? Not necessarily. But it can create a financing problem that needs to be addressed quickly. This is one reason I believe the buyer relationship should begin with a discovery meeting before we start looking at homes. The offer price is only half the equation. The other half is whether your financing can support the price you agreed to pay.
The Bank Is Looking at Two Things
When a lender approves a mortgage, it is essentially asking two questions.
First: Can you repay the mortgage?
The lender looks at your income, debts, credit history, down payment and other financial information to determine whether you can service the mortgage. A pre-approval helps establish how much you may be able to borrow, but it does not guarantee financing for a specific property.
Second: Is the property adequate security for the loan?
The lender also needs to be comfortable with the property securing the mortgage. If you stop making payments and the lender eventually has to rely on the property as security, its value matters. That is where the appraisal comes in.
You may be financially capable of carrying an $800,000 mortgage. But if the property is valued lower than expected, the lender may not be prepared to advance the full amount you need.
A Simple Example
You agree to purchase a property for $1,000,000. The appraisal comes back at $950,000.The issue isn't necessarily whether you can afford the mortgage.
The issue is that the lender may determine that the property does not provide enough security to support the amount you want to borrow. Depending on the mortgage, lender and your down payment, you may need to bring additional cash to the transaction. That's the appraisal gap. And it can happen even when you have already been pre-approved.
Why Might the Appraisal Be Lower?
There isn't necessarily anything wrong with the property. The appraiser may reach a different conclusion about market value based on:
Recent comparable sales
Property condition
Renovations and their contribution to value
Location
Unusual characteristics
Limited comparable properties
Changes in the market
In some cases, the buyer simply agreed to pay more than the available market evidence supports. That doesn't automatically make it a bad purchase. But it can change the financing.
What Can You Do?
The options depend on your financial position, mortgage and contract.Bring additional cash.
If you have the liquidity, you may choose to increase your down payment and proceed.
Review the appraisal and financing.
Your mortgage professional or bank can review the situation and determine whether another financing structure or lender may be appropriate. Co-signer is an option sometimes.
Consider Vendor Take-Back financing.
In some circumstances, the seller may be willing to finance part of the purchase price. This is not common or automatically available and requires the seller's agreement and appropriate legal and financial advice.
Consider whether renovation financing can be part of the overall structure.
For some properties, approved renovation costs may be incorporated into a financing strategy, depending on the lender and circumstances. I wrote more about this in How to Pay for Renovations Before Selling (and After Buying) in Vancouver.
Reconsider the purchase.
If the numbers no longer make sense, reconsidering the transaction may be the right decision. Whether you can do that depends on the terms of your contract and the circumstances.
This Is Why the Discovery Meeting Comes First
This is one reason I don't believe buyers should start their home search by simply sending me listings they like. Before we shop, we should understand your financial parameters. Not just:
What will the bank approve me for?
But:
How much are you comfortable spending, how much cash do you want to retain, and how much flexibility do you have if something unexpected happens? That conversation can change how we approach the entire search. It can also prevent a problem from becoming a crisis.
My Role When Something Goes Wrong
I am not your mortgage broker, financial planner or lawyer. Those professionals have an important role and should be consulted on matters within their expertise as part of your team.
My role is the real-estate side of the puzzle.
Over the years, I have built relationships with mortgage brokers and other professionals who can help explore different solutions when a problem arises.
My job is to understand the issue, bring the right people into the conversation and help navigate the real-estate side of the transaction toward completion.
Sometimes the problem is obvious.
Sometimes it is a problem the buyer didn't know they had until it surfaced.
Proactive service means looking for those problems before they become surprises.
White-glove service means being there to help solve them when they do.
Don't Confuse BC Assessment With a Mortgage Appraisal
BC Assessment and a mortgage appraisal serve different purposes. Your BC Assessment value should not be assumed to be the value a lender will use when assessing a property for financing. The lender's valuation is part of its own assessment of the property and the risk associated with the mortgage. BCFSA materials recognize appraisal or other objective evidence of value in determining loan-to-value.
The Bottom Line
Getting mortgage approval isn't the finish line. The lender needs to be comfortable with you as the borrower and the property as its security. That's why the offer price is only half the equation. The other half is whether the financing can support it.
And that's something worth understanding before you make the offer, not after.
