Mortgage Options for Pre-construction Property
Wednesday Dec 20th, 2023
Experts say you have options to get around not qualifying for a mortgage after putting a down payment on a pre-construction — including finding a co-signer.
High interest rates and a softening real estate market have left many purchasers of pre-construction homes financially under water at closing time.
Those who bought pre-construction homes when interest rates were at rock bottom might struggle to get a mortgage now, thanks to higher interest rates, a softening real estate market and more stringent stress test rules. But experts say you have options.
We’ve been seeing more cases where these pre-construction purchases are appraising close to purchase, a bit more than purchase, or less than purchase.
For the most part, lenders lend on the lower of two values of the pre-construction purchase price and the appraised value.
For example, if you bought a pre-construction home for $1,000,000 and it appraises for $900,000, you would secure a loan of 80 per cent on $900,000, or $700,000. In other words, you would need to somehow come up with the extra money to bridge that gap, putting many in a difficult spot.
Taking out a private mortgage is a last resort.
People need to understand the recourse that could be taken against them from the builder for not closing. People are willing to finance or refinance, even if it’s at higher interest rates, to avoid breach of contract, even if some just need to close and then turn around and list and sell in some cases.
For those who can’t close, one option is to assign a contract to someone else or sell your contract to someone else before the property is registered. I think assignment is a last-case scenario because you’re probably leaving a lot of money on the table, and you have to offer a steep discount to use it.
Instead, figuring out if someone can co-sign your mortgage. This way, you’re not seeking secondary financing but instead enlisting the help of someone else to boost how much you can qualify for.
Another option, and one that should generally be your last resort due to high fees and risk, is to take out a private mortgage.
There’s been an uptick in private mortgage inquiries because people can’t close. He adds that you can take out a nonbank, short-term private mortgage bridge loan to help you close on the purchase by using your current home, which is listed or will be listed for sale, as collateral.
When your current home sells, the loan proceeds are carried over to pay down the bridge loan. (A bridge loan is a type of short-term financing that someone can use before securing permanent financing, such as a private mortgage.)
Consider all your options before assigning your contract.
The market of assignments right now is quite flooded, so think about whether it still makes sense for you to move forward, or do you cut your losses and just sacrifice your deposit and move on?
By Srivindhya Kolluru Contributing Columnist