Reasons a Property Can be Declined by the Lender.
This post is an excerpt from the Canadian Mortgage Trends article of the same name, authored by Ross Taylor, April 27, 2021.
To secure a mortgage, the borrowers and the property have to pass muster. No one knows the exact property you are going to buy when you are pre-approved. When it comes time for the lender to approve your mortgage, there are many ways the specific property can impede the approval.
There are several reasons why a specific property can cause concern. For more information, we defer to Dustan Woodhouse, whose passionate concern for this topic inspired this article and who lists many more here.
Value of The Home: When multiple buyers are competing on the offer presentation day, there can only be one winner. In this market, the winner often has to bid much more than the market value. When this happens, the appraisal may come back with a value less than you paid. That will not necessarily kill your mortgage approval, as long as you have additional financial resources to cover the shortfall, if necessary. Note: This market does not favour buyers who go in subject-free (firm) with no wiggle room. If you are using all your financial resources to come up with the down payment and closing costs, what can you do if the value comes back lower?
Property Condition: Have you ever seen an MLS listing that says “as-is” or “handyman special?” Those are red flags to a lender, and a mortgage may not be forthcoming at all. The appraisal may further report poor conditions, mold or even structural issues.
Property Specifics: There are many reasons a property may prove challenging. Here are some examples of property types that will seem problematic to a lender:
Log homes
Homes on leased land, First Nations, government or private
Rural properties with a hint of hobby farming
Properties containing asbestos, underground oil tanks, aluminum wiring
The remaining economic life of the property
Suppose the property was a one-time grow-op or drug lab. Good luck with that – no matter the price you pay, even if the property has been remediated.
One property earlier this year had an MLS listing that proudly mentioned a 15-foot fish pond in the backyard – with a fish farm permit. That mortgage was VERY hard to place.
Location: If a lender feels the property you picked is simply too far from your workplace, they may assume you need to keep a second home or place to stay, and in such cases they impute a “shelter cost” for you. This might also skewer your approval.
Condos: Mortgage insurers keep lists of condo buildings they do not want to lend against. Maybe the maintenance fees seem extraordinarily high or the condo status certificate reveals significant assessments; for example, something like Kitec Plumbing.
The smaller the condo is means fewer interested lenders. Many lenders simply do not like to lend against micro-condos. Condos under 500 square feet are often a cut-off, but in recent years that number has shrunk to 400 SF or less with some lenders. It might depend if the unit has a separate bedroom. In some of these suites, the bedroom is a wall bed/Murphy bed.