Pre-construction closing in Ontario: what if the appraisal comes in low?

In Ontario, a lender generally appraises a pre-construction home at closing and, if the value is below the price you agreed with the builder, lends against the lower value. You generally make up the gap in cash, subject to lender approval. The builder's agreement sets interim occupancy, closing dates and any right to assign your purchase, and a real-estate lawyer reads it. Questions about HST, including rebates and HST on an assignment, are for an accountant; this page covers the mortgage side only.

Why the appraisal happens at the end

A pre-construction home is often bought years before it is finished. The lender lends against the home it will hold as security on the closing date. So the lender generally looks at the value then, not the price on the day you signed. If similar homes are selling for less by the time yours is ready, the appraisal can come in under your price.

The mortgage itself is also generally confirmed near closing. Rate holds are commonly 90 to 120 days, so a pre-approval from the day you signed has generally expired by the time the building is ready. The lender generally checks your income and credit again at that point.

A worked example of a low appraisal

These figures are illustrative, not a quote, and the example assumes the lender lends 80% of the value it accepts.

• Price in your agreement: $800,000. You planned 20% down, $160,000 (deposits plus cash at closing), and a mortgage of $800,000 × 80% = $640,000.
• Appraisal at closing: $760,000, which is $40,000 below the price.
• What the lender lends: 80% of the lower value, $760,000 × 80% = $608,000.
• Cash you now need: $800,000 − $608,000 = $192,000, which is $192,000 − $160,000 = $32,000 more than planned.

The extra cash ($32,000) equals 80% of the $40,000 value gap, because the lender lends $32,000 less. Closing costs are extra; see closing costs in Ontario.

Ways buyers generally close the gap

• More cash from savings, or a gift from family; see whether your down payment can be a gift.
• A second look at the value. Another lender may order its own appraisal and read the value differently, subject to lender approval.
• An alternative lender may lend more against the value where a bank will not, generally at a higher cost and for a shorter term.
• Starting early. Ask lenders how they appraise new homes months before closing. Asking early leaves time to plan for a shortfall instead of finding one a week before.

Who decides what at a pre-construction closing

• The lender decides the value it accepts and how much it lends, subject to lender approval.
• Your real-estate lawyer reads the builder's agreement, which sets interim occupancy, how closing dates can move, and whether and on what terms you can assign the purchase. Interim occupancy is the period, common with new condos, when you can move in before the sale closes and pay a monthly fee to the builder.
• Your accountant answers HST questions, including any new-home rebate and the tax on an assignment.
• We handle the mortgage side: which lenders fit, what each needs, and the cash the numbers call for.

What to do next

Check what you can carry with the affordability calculator. If your closing is within the next year, use our call-me-back form, and we will go through the appraisal and the mortgage with you before the date arrives.