NEW BUILD PRE-APPROVALS
Are you planning to build a house?
I have gotten lots of good feedback with respect to this issue. The question was, Do you think it is fair for homebuilders to require FIRM offers sometimes 1 year prior to possession? The overall consensus is no. In my personal opinion there must be more due diligence done before allowing someone to hand over their deposit on a firm offer. There must be an affordability test done for future rate increases. Also, I think that in cases where unforeseen events prevented your qualifying for a mortgage you should be allowed a way out. Nobody could have predicted the changes to the rules with respect to mortgages, especially a regular consumer.
First I think what needs to be understood is that the builder will require a deposit of 5%-10% (non-refundable) possibly more when you agree to purchase a house. They also require you to go and either get a mortgage pre-approval from their financing company options or obtain it elsewhere. Based on that they feel they can comfortably allow you to waive your condition of financing making the agreement a firm offer to purchase.
What I feel is being overlooked through-out the process is the possibility of rule changes and/or rates both having an affect on the outcome of your mortgage. In the last couple of years we have seen quite a few instances where maximum amortization periods have been reduced. If you were qualified for a mortgage on a 35 year amortization period you may not qualify at todays reduced amortization periods.
Also, you need to ensure your financial stability is there. I would suggest you do an affordability test or have your broker or bank do it, better yet just call me. I would qualify you on higher rates to ensure you will still qualify down the road should mortgage rates increase. I think preparing for worst case scenario is probably the best thing you can do. Another possibility is to pre-qualify some possible co-signors to make sure you have a plan b in place.
Another thing that must be looked at is as soon as you enter an agreement to purchase a house you should not allow anybody to pull your credit. Nor should you apply for any additional credit cards, loans or lines of credit. Not only that, I would not apply for increases to my existing credit accounts.
One potentially fatal mistake is changes to your employment. I would not recommend any changes to your employment situation until you get possession of your new house.
At the end of the day I think it is absolutely crucial to consult with somebody such as myself to ensure as many steps are taken as necessary to help ensure you don't end up losing your deposit and possibly getting sued by the home builder.