Mortgage Blog

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What Is A Shortfall?

February 22, 2021 | Posted by: Ask Ana Cruz

Are you thinking of submitting an offer with no conditions? Before we begin, if you have questions about what submitting an offer with no conditions means, then I encourage you to go back and watch our video called  “Submitting an Offer with NO Conditions”

Today we are going to talk about Shortfall and what that may look like for you. 

First, what is a shortfall? A shortfall is the difference between the purchase price of a home and what the house is appraised for. If you have a shortfall it is because the appraised value of the home came in lower than what you paid for the house and the shortfall is the dollar difference between those two amounts.

I find the best way to explain this is with an example:

Alex and Taylor are pre-approved for $800,000. 

  • 1. The property they are interested in is listed at $650,000 which is under their pre-approval amount  
  • 2.They submit an offer for $750,000  - which is $100,000 over asking but, they are in competition and really want that house so they also go in FIRM with NO CONDITION   

So what’s the problem here? 

Well let me share with you what I would have said to Alex and Taylor if they had called me prior to submitting a FIRM offer over asking price. 

When you go over asking price, lenders want to ensure that the property they are lending on has the value the buyer placed on the home. To ensure this, lenders will conduct their own due-diligence and will require an appraisal to be completed on the house to confirm that the value is in fact there.

Let’s explore the risks: 

  • 1.Your Listing Price $650,000 

  • 2.Your Purchase Price $750,000

Since the purchase price was over list price, an appraisal is required and lets assume...

  •  3. The appraisal comes back at $700,000

  •  4.Now you have a shortfall of $50,000 ($750,000 -$700,000 = $50,000 shortfall)

This means in the lenders eyes, they are financing based on the $700,000 and you now have to come up with the shortfall. 

 This is especially an issue if you are putting the minimum down payment needed for your purchase. In this case the minimum down payment is $45,000 on a purchase of $700,000

In this case Alex and Taylor now have to put down their minimum down payment of $45,000 and they have to cover the shortfall of $50,000. Which means in total they have to come up with $95,000 down payment. Where are they going to get the additional funds? The lender will not give them more than the house is appraised for. This is what we call a shortfall. 

The main issues with a shortfall is the down payment is affected but it can also affect qualification. It is very important to have a conversation with your mortgage broker prior to submitting a firm offer.

Should you have more questions, or want to discuss your situation further, please connect with us. 

 

 

Want to connect?

Email me at ana@askanacruz.ca | Call or text 905-870-0513 

Alternatively our office can be reached via text at 289-769-8864


 

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