When you’re buying a home, negotiating a price reduction after the inspection can feel like a big win. If the seller lowers the price by $5,000 for issues such as an aging roof or a faulty furnace, that savings can help cover the repair costs.
However, while the price drop makes sense and is a great thing for you, there is a risk in assuming the lender will automatically be fine with the lower price.
Why This Can Become A Problem
When a lender originally approves your mortgage, they are approving it based the information provided in the MLS listing, appraisal where applicable and the original purchase contract. A price drop can signal the underwriter that something has decreased the value of the property, and this can become a major concern and issue for them.
Lenders Care About “Marketability.”
Lenders aren’t just looking at your credit score and income; they are looking closely at the asset securing the loan. If you default on your payments, the bank needs to know they can easily sell the property to recover their funds. This is why the “marketability” of the property is extremely important to them.
When a price drop occurs, it is most often triggered by the results of an inspection. The lender’s immediate questions are: Is this issue structural? Is it dangerous? Does it involve something that makes the property unmarketable or uninsurable? Does it involve a characteristic of the property that the lender does not lend on?
Ineligible Property Characteristics
Many people don’t realize that mortgage lenders and default insurers (like CMHC, Sagen, and Canada Guaranty) maintain strict lists of property characteristics they will flat-out refuse to finance. If your inspection uncovers one of these items and triggers a price drop, the bank may instantly disqualify the property entirely – meaning your approval is now cancelled.
The following is a non-exhaustive list of common property “red flags” that may trigger a file review or even an automatic decline.
NOTE: Lender and insurer policies change frequently, and guidelines vary across financial institutions.
Plumbing and Electrical:
- polybutylene (Poly-B) piping
- knob and tube wiring
- aluminum wiring
- electrical service under 100 amps
Environmental and Safety
- former grow-ops or illegal drug labs
- active mold infestations
- asbestos
- active water damage or ongoing leaking
Structural Integrity
- non-standard foundations (wood foundations, certain steel/pile systems without structural engineering sign-off)
- Severe structural shifting or foundation cracks
Zoning and Location
- residential properties directly bordering heavy industrial factories or commercial zones
- properties with unpermitted or illegal secondary suites
- homes with remaining “economic life” under 10-15 years
- severely derelict homes
- “as is where is”- may indicate that the property is not marketable and may be unfinished or in disrepair
Price Drops Require Re-Approval
A change in the purchase price means the contract has been amended.
The lender must issue a new commitment letter reflecting the updated numbers.
Your mortgage broker must resubmit the amendment with the new purchase price to the lender and default insurer for re-approval. This is not an instant process and can take a few days to process depending on the time of year and the turn around time the underwriter can review, get insurer and lender approval, and reissue. The process is:
- The underwriter will request from your broker or banker the reasons for the price drop. Underwriter are required to due their own due diligence to ensure the approvals they provide fit within the policies of the institution they work for (lender). If for whatever reason they feel they need further information, they may require a list explaining the exact reasons for the price drop or they may condition to see the full inspection report to ensure the property still meets their criteria. The inspection report may show deficiencies or characteristics that don’t align with their policies, so even if it seems insignificant to you, if the inspection report is requested it is imperative you have their feedback before you remove your conditions.
- Once approved, the new commitment will need to be resigned and sent back into lender for sign off.
- If the new information they have received about the property changes their willingness to lend on it, they can cancel the approval and decline the mortgage to you as the property no longer meets their policies.
Waiving Conditions Too Soon
We are seeing an alarming trend where buyers negotiate a price drop, sign the amendment, and waive their buyer’s conditions at the exact same time, without giving themselves the time to ensure their file has been re-approved by their mortgage lender.
If you waive your financing condition before the lender signs off on the new amendment, you are legally locked into buying that house. If the lender later reviews the reason for the price drop and decides the property doesn’t fit their risk box, you lose your mortgage approval, your deposit is forfeighted and you could be sued by the seller.
How to Protect Yourself
If your home inspection reveals issues and you want to negotiate a lower price, here is what we recommend to protect yourself:
- Notify MSW Immediately: Before you formally sign a price reduction amendment, give us a heads up. We need to look at the reason for the drop and see if it might impact your approval.
- Get a Financing Extension: Have your Real Estate Agent request a financing condition extension from the seller, along with the price amendment. Turn around times with lenders underwriting centres can change depending on how busy a lender; seek advise from your broker who let you know what your lenders updated review times are to ensure you have provided enough time to secure a new commitment letter.
- Wait for the Green Light: Only waive your conditions after we explicitly confirm that the lender and default insurer have reviewed the amendment, accepted the price change and have issued a new commitment.
Save the Money and Protect Yourself
Getting a price reduction on your future home is a fantastic outcome, and you absolutely should pocket those savings when they are justified.
But remember: a price drop is a brand-new material change to your legal contract and must be re-approved by the lender and insurer.
To keep your deposit safe, please treat the price amendment and the condition waiver as two completely separate steps. Avoid signing them simultaneously.
Send the amendment to us first, get the confirmation your mortgage is secured (new commitment) and then waive your conditions.
