How a Financing Condition Can Protect Buyers From Financial and Legal Penalties
When you make an offer to purchase a home, in addition to considering how much money to offer, you also need to think about any conditions that you want to include. Some common conditions deal with home inspections, the sale of another property, or insurance coverage. But possibly the most important condition deals with your ability to obtain financing. In a hot market, many buyers are tempted to waive all conditions to make their offer more attractive to the seller. This is at your own risk.
What is a Financing Condition?
A financing condition is a clause in your offer to purchase that gives you a period of time to confirm you are able to get a mortgage approval for the home you want to buy. That time frame is usually five to seven business days. This allows you to walk away from the offer, with no penalties, if your financing is denied or the financing terms are not satisfactory to you.
Why People Often Waive a Finance Condition
So, if a financing condition protects you from monetary disaster or legal action, why on earth would you remove it from your offer? Because sellers love unconditional offers. They may not want to take a chance on an offer that might fall through, especially if they have competing offers on the table that don’t have any conditions attached. This is more common in hot real estate markets or with properties in very desirable neighbourhoods.
Why You Need One In Your Offer – The Worst-Case Scenarios
Despite the temptation (and sometimes pressure) to provide an unconditional offer, a financing condition is essential if you want to avoid any of the following worst-case scenarios:
The Appraisal Comes In Low
When you ask a lender for a mortgage, they will check to make sure that the property is actually worth what you’re offering to pay for it, so if you default and they end up having to resell it to recoup their losses, they can get all of their money back. Most of the time, the appraisal matches the offer being made, but occasionally it comes in lower than your offered price, meaning you may be on the hook for the difference between the appraised value and the purchase price
You Don’t Get Approved For Financing
Even if you’ve been pre-approved for a mortgage (which you should do – more on that later), that doesn’t always guarantee you’ll get it. When a lender prepares to offer you a mortgage, they will do a deep dive into your credit history and financial situation, which may turn up undisclosed debt or another issue. Or your circumstances could abruptly change – such as a job loss or the need to take on new debt for a car or other emergency — and that can affect your chances of getting a mortgage.
You Get Approved for a Lower Amount than Expected
There’s also a risk that your lender, when doing that deep dive into your finances, may decide not to extend you as large of a mortgage as you initially asked for. If that happens, you might have to come up with a much larger down payment than you planned for.
The Risks of Not Including A Finance Condition In Your Offer
You may be wondering, what are the actual consequences of those scenarios? Surely the seller will understand that you couldn’t get a mortgage and everyone can just move on? Unfortunately, this isn’t always the case. Here are some of the specific consequences you could face if you waive your financing condition and your mortgage falls through.
Losing Your Deposit
When you submit an offer to a home seller, that offer generally includes a cash deposit, usually equal to one per cent of the purchase price. If you don’t include a financing condition and you have trouble obtaining financing and want to back out of the sale, the seller is not required to refund your deposit. In fact, it is part of the agreement that they are supposed to keep the deposit funds.
Being Required to Follow Through With A Sale Without Financing
Without a financing condition, you could end up legally required to go through with the purchase of the home you made the offer on. Yes, that’s right – the law says you have to buy the property even though you don’t have the funds to pay for it.
If you do back out of the sale, you could end up being sued by the seller for the loss of that income, especially if they lost out on another home they were trying to buy.
The Importance of Pre-Approval
All of this reinforces the importance of getting pre-approved for a mortgage before you begin looking at homes in earnest. It can take a little time and effort, but it’s worth going through the process to gain a measure of confidence in your ability to get a mortgage, as well as finding out how much you can reasonably spend on a home. You can make an offer on a home without getting pre-approved first, but it’s much riskier for you.
Reasons to Work With a Mortgage Broker
Working with a trusted and qualified mortgage broker is always a good idea, especially if you’re a first-time home buyer. Their knowledge, expertise, and access to lenders can demystify the process of obtaining a mortgage and help you decide whether you need a financial condition attached to your offer or if you can safely waive it.
Purchasing a new home can be a stressful experience, especially in a hot real estate market where competition is fierce.
While placing an offer with no conditions is the norm in the current real estate market, know that doing so can be incredibly risky. If you have been pre-approved, you will have done a great job in getting prepared and eliminating some of the risk, but it’s important to remember that there is always a risk when placing an unconditional offer.
Don’t leave yourself vulnerable to financial and legal risks. Consult with your mortgage broker before making an offer that doesn’t include a financing condition. Our team is here to help you every step of the way.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.