Overbidding and financing: when the bank doesn’t follow… your portfolio pays the price

Overbid and Financing: when the bank doesn’t follow… your portfolio pays

In a overheated market, it’s tempting to overbid to finally succeed in buying a house. But beware: when you pay more for a property than its market value, the bank doesn’t finance everything… and the real bill can explode.

A good real estate broker and a good mortgage broker will always warn you about this.

Essential reminder: what the bank really finances

The bank always finances the smaller of the following two values:

• the price paid at house purchase
• the appraised value (market value estimated by the appraiser mandated by the bank)

If the appraisal is lower than the price paid:

1. Your 20% down payment is calculated on this reduced value;
2. The difference between the price paid and the appraisal becomes a non-financeable portion that you must pay in cash;
3. This portion can:

• strongly increase your actual down payment;
• bring you below the 20% threshold, which triggers an insured loan (mortgage insurance premium to pay).

Concrete example with amounts

Imagine this typical overbid scenario in a hot market:

• Asked price: $500,000
• You bid (overbid): $550,000
• Bank appraisal: $520,000
• You aim for 20% down.

1. What the bank is willing to finance

The bank bases on $520,000 (the appraisal), not on $550,000.

• Minimum down payment at 20% on $520,000 :
• 20% × 520,000 = $104,000
• Mortgage amount :
• 520,000 – 104,000 = $416,000

2. The non-financeable portion to pay in cash

You agreed to pay $550,000, but the bank “recognizes” only $520,000.

• Non-financeable difference:
• 550,000 – 520,000 = $30,000

You must therefore bring:

• Down payment of $104,000
• + $30,000 non-financeable
• = $134,000 in total

Thinking you had 20%, you end up putting the equivalent of 24.4% of the price paid. And if you don’t have these additional $30,000, you’ll have to either:

• reduce your down payment percentage;
• drop below 20% and end up with a more expensive insured loan.

Why talk about it before making an offer?

In a overheated market, overbidding is common. But:

• The bank protects its risk by basing itself on the market value, not on your emotions or on competition.
• If you overpay, they don’t follow : it’s your portfolio that must cover the gap.
• An experienced real estate broker can help you to :
• analyze comparable sales,
• limit the overbid,
• negotiate terms (e.g., financing clause, appraisal clause) to protect you.

Conclusion: thoughtful overbid, controlled down payment

In summary :

If you overpay for a property, the bank finances the smaller value between the price paid and the appraisal. The down payment calculated on a reduced value, plus the non-financeable portion, can make the amount you need to pay out of pocket explode and, sometimes, push you into an insured loan.

Before diving into an overbid for a house purchase in an overheated market, talk to your real estate broker and your mortgage specialist. It’s better to know the real impact on your down payment… before signing.