The Problems With Going Firm & Some Things You Should Know About High Ratio Mortgages

2017-03-09 | 09:16:52


Let there be no doubt, we are in a seller's market in the GTA. If you are looking to make a purchase in 2017 you will find that you are competing with many other buyers out there. It is not uncommon for real estate agents to advise their clients that not only should they expect to go in above asking, but to go in "firm", that is, with no conditions. While you might get away without a condition of home inspection, the decision to exclude a condition of financing in your offer is not one that should be taken lightly. After all, buying a house in this market is probably only the biggest financial move you will ever make, right? Remember, if you go firm you are entering a contract to purchase a home for a said price on a said date. If you cannot fulfill your contractual obligations you risk getting sued by the seller, especially if they have purchased a new home as well. How best to reduce the risk?

First, you should get a mortgage pre-approval. But make sure you are getting a pre-approval that has actually been underwritten by the lender. If you think you have been pre-approved but have not submitted any income documents for review, chances are you only have a rate hold. A rate hold alone does not necessarily mean you will get approved for the mortgage you need. A manually underwritten pre-approval gives the lender a true picture of your current financial situation and as long as that doesn't change by the time you close, you should be fine. It is not uncommon for mortgages to be jeopardized due to things such as unresolved separation agreements, outstanding debts, etc.

Second, make sure you are working with a real estate agent that truly knows the area where you are looking to buy. Don't hire someone just because they are your cousin or they are offering some incentive or "gift" which really means nothing at the end of the day. You want to make sure you are dealing with a real estate professional who is reputable, honest and knows the neighbourhood inside out.  You want to make sure that you are working with someone that will help you make an appropriate offer.

Third, if you are planning to go above asking price in addition to going firm, be aware of how the appraisal will impact the deal. Every mortgage on a purchase will require an appraisal. But buyers sometimes forget - even those who have been pre-approved - that the mortgage is only about 50% of the transaction. The other 50% is the property itself, and if the appraisal comes back low, you will be required to cover the difference. Let me repeat that: IF THE APPRAISAL COMES BACK LOW, YOU WILL BE REQUIRED TO COVER THE DIFFERENCE. In other words, if you go firm on a purchase at $700,000 but the appraiser decides the home is only worth $650,000 you will now have to add $50,000 onto your original down payment. And lenders often have set guidelines for the source of the down payment, so be forewarned. A low appraisal does not necessarily mean you overpaid, it could just be that the appraiser cannot find any comparables in that price range. The appraisal is where a lot of deals fall apart, so make sure you know exactly what you are getting yourself into.

One final thought: if your down payment is coming from the proceeds of a sale you must decide if you would rather sell first or buy first. There are pros and cons for each scenario. If you buy first you have committed yourself. What happens if you can't sell your home for what you thought you'd get? Are you prepared to cover any shortfalls on your down payment? On the other hand, what if you sell first but can't find a new home to purchase? You might have to rent for a while or move in with the in-laws…are you ok with that? Again, the decision to go firm is something that should not be taken lightly. It is important to speak to both your real estate agent and mortgage professional to reduce risk by as much as possible.


Also known as an insured mortgage, a high ratio mortgage typically applies to a PURCHASE transaction, where the down payment meets the minimum 5% requirement but is less than 20%. Unlike a low ratio, or conventional mortgage, where the down payment/equity is 20% or greater, the borrower will be required to pay a mortgage default insurance premium. Under current guidelines, a high ratio mortgage is among the products which require the borrower to qualify using the greater of the contract rate or the "stress test" rate. A high ratio mortgage does not apply in a REFINANCE transaction, where equity is converted into cash, as the remaining equity must be at least 20%. However, in a SWITCH transaction, where the borrower is up for renewal and is considering moving to a different lender, a discounted contract rate may be available if the mortgage was previously insured. This is because high ratio mortgage rates are sometimes priced lower than conventional rates. If eligible, the lower rate would apply even if the equity in the home has now reached or exceeded 20%. As with a refinance transaction, a high ratio mortgage cannot be used towards the purchase of a rental property, the purchase of a property that is $1 million or more, or in situations where an amortization greater than 25 years is required.

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