Work with a legitimate mortgage broker or lender
It may sound obvious, but to avoid getting ripped off when buying a home, always work with experts and professionals — and this is particularly important when working with a mortgage broker.
“Beware of scammers who promise to get you a good deal on your home loan for an upfront fee,” explains Chris Allard, an Ottawa-based mortgage broker.
In some cases, potential homebuyers pay hundreds and even thousands of dollars in upfront fees to unscrupulous mortgage brokers. Some of these mortgage advisors will even accept a mortgage application and charge a fee, even when the buyer does not qualify for the mortgage loan.
More from MoneyWise
- Can a home price estimator keep you out of bidding wars?
- Barry Choi: Canada's 2022 federal budget won't make housing more affordable
- 4 affordable Canadian housing markets for investors in 2022
According to the Financial Consumer Agency of Canada, upfront fees on loans – including mortgage loans – are illegal. To protect yourself, watch out for these red flags:
- Mortgage advisors who ask for upfront fees to process your application.
- Advisors that promise to get you a loan (usually for a fee), regardless of your credit problems.
- Emails offering to help you get a loan (many unsolicited emails are scams).
Another reason to work with trusted professionals is to avoid the pressure of making false statements on your loan application.
“Do not let anyone persuade you to overstate your income, understate your debts or lie about your down payment source,” explains Jeff Johnston, real estate agent and acquisitions manager at Simple Homebuyers.
“Lying about anything in your loan application is illegal, and the legal consequences can be severe,” says Johnston.
Improve your financial well-being
Don’t skip the home inspection
Never make an offer that doesn't include a home inspection — even in a hot seller’s market.
“To keep your offer competitive, agree to complete the inspection within three days of an accepted offer,” explains Melanie Hartmann, owner of Creo Home Buyers, a firm that specializes in buying, rehabbing and reselling residential homes.
“If something comes up during the inspection, you can always ask to extend the offer condition to investigate the potential issue.”
Another option is to ask your agent to schedule an extended viewing before the offer date and then schedule a home inspection for that time, explains Lambros Demos, a real estate agent with Toronto-based Royal LePage Realty Plus.
In most circumstances, if your offer is competitive and you can demonstrate solid financing, the request for a satisfactory home inspection should not be an issue for the seller. Of course, it may also mean losing out — but there can be more risk if this step is skipped.
It’s what Colin and Mary Schmidt learned after making an offer on a White Rock, B.C. home in early 2020 (we’ve changed their names to protect their privacy). Despite a very competitive seller’s market, the Schmidts insisted on a home inspection, and the sellers accepted.
Turns out the home had mould due to a significant leak. Rather than spend the more than $20,000 it would have cost to cover remediation costs, the Schmidts walked away.
Assess the appraisal risk
In hot markets, where home prices are at their peak, it’s a good idea for potential buyers to consider the impact of a near-future market downturn. One way to protect from overpaying for a property is to include a condition that forces the seller to adjust the sale price if the mortgage lender’s appraisal comes in lower.
“In this crazy market, it’s very tempting to offer a well over list price,” says Robert Wiley, an accredited buyer’s agent at Samson Properties.
However, if the seller does this without a backup clause, the buyer ends up on the hook.
In virtually all residential markets, lenders require a mandatory appraisal on the home. If this appraisal comes in lower than the buyer’s offer, the buyer is responsible for coming up with the funds to cover the shortfall.
“Sure, sellers have the upper hand, but that doesn’t mean buyers need to take chances. Whenever possible, get the seller to agree to a price reduction based on the appraisal report.”
Wealthsimple x MoneyWise
Use title insurance
When you buy a resale home, the seller will sign paperwork that gives you the legal ownership of the property. This paperwork is known as the “deed” or “title” of property, and copies of every change are kept on file at the land registry offices in your district.
To protect yourself against potential challenges to the ownership of a property, buyers can purchase title insurance. The one-time fee for this insurance starts at $250 and the coverage lasts for as long as you own the property.
Some of the common situations where title insurance can protect new homeowners include:
- Errors in property assessment, such as boundaries and surveys
- Fraud related to land ownership
- Existing debts or liens against the property (including unpaid taxes, fees, etc.)
- Issues that affect the potential sale of the property in the future
Title insurance saved Mark (last name not provided) from paying $11,000. Mark bought a townhouse with his wife in Ajax, Ont. and still recalls how shocked he was when he read the letter from the municipal tax office demanding unpaid property taxes. The previous owners had sold the townhome without clearing their tax bill. Mark immediately called his lawyer, who submitted a claim through the couple’s title insurance policy.
“We paid nothing out of pocket,” says Mark.
Don’t sign a blank document
“One tip that would help buyers avoid getting ripped off when buying a home is to never sign a blank legal or financial document,'' explains Johnston.
A completely blank document, or one with blank pages, is usually a red flag — and should be a prominent warning, says Johnston. A less-obvious strategy is to leave sections or even just a critical line or two blank. If a buyer signs a document with a blank line, the other party can add conditions or owed sums that become legally binding. This type of fraud falls under the umbrella of "service fraud," which was one of the top 10 fraud types that impacted Canadians in 2020.
To avoid potential issues write “n/a” on blank lines or empty pages and add your initials and the date. It’s also a good idea to ask for legal advice if you aren’t sure or comfortable with a document or agreement.
The entire home buying process is stressful, and each stage is fraught with uncertainty. What doesn’t need to be part of the process is getting ripped off. By being mindful of these five tips, buyers have a much better chance of becoming successful homeowners without damaging their credit or their bank account.
You're 5 minutes away from the best mortgage
Searching for your perfect mortgage shouldn’t be hard.
Homewise is an online brokerage that will negotiate on your behalf with more than 30 big banks and other lenders, completely free, and it only takes five minutes to apply.
If you're in the market for a new mortgage, or if you're looking to refinance before interest rates rise again, go to Homewise now and answer a few simple questions to get started.