With the current low inventory of homes for sale, several clients are choosing to buy pre-sales (or condos/townhomes under construction) directly from the Developer. This can help to avoid the nutty competition that is happening with existing homes. I recently had a client reach out with some excellent questions regarding this process and I thought I would share my responses here:
How does the mortgage process work when you are buying a new condo or townhouse for a move up?
The Buyer would make an offer to the Developer and once accepted, with all new construction purchases, the buyer then has a 7 day Recission period (Subject Period). During this time, we would line up the new mortgage approval. That approval will be CONDITIONAL as it would be contingent on the sale of your current home in conjunction with or prior to the closing on the next purchase. NOTE: The approval is also conditional on all your financial details staying the same such as your debt load, income/employment and savings. The interest rate for the new mortgage will be set later, when you are 120 days from the closing of the new purchase.
I understand usually there's a deposit required at signing, then another deposit after a certain amount of time. How does that work?
Yes, the deposit is held by the Developer and in some cases this is a phased process. So 5% - 10 % after the 7 days and then perhaps another 5 – 10% at a later date. These details often differ between developments and are dependent on the timeline for the final completion. This requires you to have cash or a line of credit to draw the funds pending the sale of your current home and access to your equity. The deposits held will become part of your down payment and are held in trust until the purchase completes.
What does the process look like with the selling of the current residence to taking on the new mortgage?
So, this is where things get tricky. Firstly, you need cash or a temporary line of credit for the deposit (noted above) as this cannot come from your sale proceeds until you actually sell. Second, you need to time your sale of your current home so that you have the money in hand to close on the new purchase. For many of my clients, the timeline has been the trickiest part! Meaning, they sold to be sure that they would have the necessary down payment in time and then the new home was delayed. This meant finding temporary accommodations! The other risk is that until you sell, you will be “guessing” as your down payment so it is better to under estimate this amount and then if you ultimately sell for a higher price, adjust the down payment later and lower the new mortgage.
What if you cannot sell for the planned price or rates skyrocket in the time between buying and selling?
BINGO – you have identified the #1 risk!
If you cannot sell for what you had hoped you will be short. That is why we will always be very conservative and assume the lower end of the future sale price to calculate net sale proceeds. Currently, I believe the rate hike is lower risk as we are already using a higher stress test for qualification. I would also say this plan should not be used if the numbers are all super tight. This is something that we review with each client individually.
The other risks of course would be losing a job or something happening that could make selling a problem. Unlikely, but let’s say a big strata expense such as a flood or sudden repair makes your current home unmarketable for a period of time?!!
So, the pre-sale buy option can be awesome but there are longer term risks that can sometimes be hard to control. It is all about reviewing the bigger picture and understanding and mitigating as many risks as possible.
Feel free to give me a call if you want to walk through your personal situation in regards to a new build purchase. It can be a great strategy when done with a clear plan.