What to do when your home appraisal falls short as the housing market cools

The red-hot housing market over the last several months pushed many buyers fighting through bidding wars to put in unconditional offers at high prices.

But now that the market is cooling, some are ending up with mortgages that can’t cover the full cost of their home following an appraisal.

Toronto-based mortgage broker Mary Sialtsis says there are “very few options” for these buyers.

“In the last couple of years, but especially in the last couple of months, I've had a few different clients that have dealt with this situation,” she told CTV's Your Morning on Friday. “Unfortunately, there are very few options when you've purchased a property with no conditions and no financing conditions.”

Nationally, home prices fell 6.26 per cent between March and April 2022 after peaking in February, according to the Canadian Real Estate Association. That’s meant some buyers are ending up with mortgages that are more than $100,000 shy of what they need.

In some cases, especially when the down payment from the buy is 50 per cent more, Sialtsis says the lender may just move forward with the mortgage based on the original price of the home, even if the appraisal is a lot lower.

“It's a case-by-case situation,” she said.

Another option may be to get a second mortgage from a private or alternative lender. But if no other option works, buyers can try and negotiate a mutual release, which usually means forfeiting the deposit.

“For most, they end up going to the bank of mum and dad,” said Sialtsis. “I highly recommend if anyone is in this situation, reach out to your mortgage professional immediately.”

Sialtsis warns that putting in offers without any financing conditions puts buyers at a huge risk, as the buyer is legally bound to close the deal regardless of whether they’re able to get a sufficient mortgage.

“I really don't think buyers fully understand the impact of those unconditional offers when they submit an offer to purchase a property,” she said. “It becomes a legally binding contract and that buyer is expected to close on the closing date. So, that's one of the reasons why there's very few options for this.”

But the cooling housing market isn't all bad news. For those looking to buy a home, Sialtsis says now is a good time to jump in as buyers have a lot more leverage to negotiate.

“For many Toronto-area buyers, where often we're dealing with multiple offers… it might be a good chance for you to get in and get a decent property with less competition or no competition and the opportunity to actually include a financing condition,” she said.