Imagine that you are looking for a house to purchase. You’ve searched high and low and have finally found your dream home. Because the real estate market is booming, you agree to pay the full asking price. You submit your offer, but another buyer outbids you. You now must begin the entire process again. Such is life in today’s hot housing market, where multiple offers are common and sellers often get more than the asking price for their home.

Our current housing market is characterized by low interest rates and a shortage of “listings”, or homes for sale. This type of market is great news for sellers, but bad news for buyers. It is always a good idea for a buyer to obtain a pre-approved mortgage before beginning their search for a home, as doing so informs them of the price of home they can afford. However, in this market buyers can face problems even when armed with a pre-approved mortgage. The reason? In the end, prices are not always what the buyer had expected.

For example, imagine that you have been pre-approved for a mortgage. Additionally, you have savings to spend on a home. Based on the amount of the mortgage for which you were approved and the amount of money you have saved, you have a good idea of what you can afford. Unfortunately, however, if you find a home you can afford but another prospective purchaser or two want to bid on the home, you could need an additional $25,000 to ensure you place the highest bid.

This scenario, which is not unusual in our current market, has serious implications for buyers. First, the buyer must remember that his or her lender has approved a mortgage of a specific amount -- not necessarily as high as what the purchaser could be required to pay. As a result, the purchaser may need to go to the lender to seek approval of a bigger loan. Doing so could move their loan into a high ratio category, meaning that the purchaser would need to pay an insurance premium through an organization such as Canada Mortgage and Housing Corporation (CMHC). If your financial institution does not approve a loan for more money, the purchaser could apply for secondary financing. While securing a loan in this way is entirely possible, doing so usually involves paying a higher rate of interest, which costs more money over the term of the loan. The bottom line is that purchasers should not get caught up in the excitement of bidding for a home without first assessing the final implications of winning a bidding war. If the price of a home is more than you had first anticipated, first determine if you will be able to finance the purchase.

Second, a lender will not advance funds without first having an appraiser determine the value of the home. Doing so enables lenders to manage the risk they assume when granting mortgages. If an appraiser determines that the home in question is not worth the price being offered, it can decline to loan the funds requested, or loan less money than the amount for which the purchaser applied. In both scenarios, a purchaser can protect himself by making his offer to purchase conditional on financing. That is to say, if a financial institution will not grant the funds required, the purchaser is not obligated to follow through with the purchase. The only downside to this tact is that in today’s hot real estate market, sellers are able to reject conditional offers.