In a hot seller’s market with low inventory and house prices rising in many regions in Canada, many homebuyers are paying over the asking price.
For example, a Bank of Canada report in April notes that roughly two-thirds of homes in the Greater Toronto Area were selling for more than the listing price in February of this year.
Whether these buyers found the perfect home and are willing to pay the elevated price, they believe the home is undervalued, or they just want to buy now before prices rise further, homebuyers need to consider the impact this will have on them if they are financing the purchase.
How does paying over asking impact financing?
Homebuyers that pay over asking may find it difficult to secure the full amount of the financing they need.
Lenders rely on an appraiser’s opinion of the value of the home, which is most often determined by looking at the local area’s comparable sales and other local market factors. The appraised value, and not the actual purchase price, is used, in part, to determine the size of the loan. If the value is too low, homebuyers may not be able to secure the full amount of financing they need and may need to look for alternatives to cover the deficiency.
Why is the appraised value different than what I paid?
Lenders require an appraised value from a licensed, experienced local appraiser expert to determine the current value of the property for lending purposes.
In many neighbourhoods, if the homes are being sold over asking, the prices of the comparable homes will reflect this and the appraiser will provide a value that is more in line with the purchase price. However, if homes are not being sold over asking, the appraised value could come in lower than expected.
Where does that leave homebuyers?
Valuation company RPS Real Property Solutions recommends caution and preparation as approaches to take for anyone looking to buy a home in a competitive market.
Buying over asking makes sense for many homebuyers, especially if you want a home in a certain neighbourhood close to family or work in a competitive market. Before you buy, stay in close contact with your real estate agent and your lender or mortgage professional to explore different scenarios and your options.
