Today’s blog post is courtesy of Ian Mucignat, a mortgage broker with TMG. We asked him, “How dangerous is it to sign an offer to purchase without a condition of financing?” He told us:
In today’s heated real estate market, it’s not uncommon to waive the Condition of Financing – waiving might be the difference between two similar offers. Let’s explore that choice…
…You’ve been preapproved for a mortgage and are actively searching for your home with your trusted realtor. One bright sunny day you find the perfect home in the perfect neighbourhood.
You’re about to put in an offer and your realtor says you can win it – if you come in with a clean offer, which typically requires waiving your Condition of Financing clause. What does that really mean?
A Condition of Financing is a clause in the Offer to Purchase saying you will purchase as long as you are able to obtain satisfactory financing by a certain date, typically 5 business days. If you are unable to, your offer lapses and your deposit is returned in full.
No condition of financing – what happens then?
What happens if you do not have a condition of financing, but are unable to secure financing?
You lose the deposit you made when the offer was accepted.
The seller may sue for damages and breach of contract. A negated offer hurts the future marketability of their property – a house that has trouble selling raises flags to the next prospect.
Let’s examine the risks of waiving and how to mitigate them.
Pre-approval ≠ approval!
Recall that a pre-approval does not guarantee a final approval – the property valuation and the property type itself must be approved. Full property assurance can never be given on a pre-approval.
When a lender/bank lends on a property they need certainty that the property value is accurate, which means an appraisal. If the appraised value comes in lower than estimated, you may be forced to provide additional down payment.
Some lenders will determine the value through either an Automated Valuation Model (AVM) or request a physical appraisal. The second part, the property itself, must be a type of property they will lend on too. For example, many lenders will not lend on log cabins under any instances!
As well, a pre-approval always has pre-funding conditions: items such as income or down payment verification. If you have switched jobs, this can present a problem. If the down payment can’t be clearly shown with statements from a Canadian financial institution, you have another problem.
Mitigating the risk
- The pre-approval can be strengthened if a full review of the key underwriting documents is completed up front. For example, income verification documents are provided, reviewed and discussed upfront with the lending underwriter. Also, the down payment sources can be reviewed for suitability and acceptability.
- The estimate of property value should be discussed with the mortgage agent in terms of location. A detached home in the GTA has much higher certainty of value than one in a rural area.
- The expected size of the down payment can provide safety too. The bigger the down payment, the safer you are in waiving the COF, as a higher down payment makes it easier to procure a mortgage.
Walk in well advised – know your risks!
Have a discussion with an experienced mortgage advisor, who will outline the risks and tolerances for your individual situation and profile. The better you understand your own situation and risks, the better your decisions.
The stress of purchasing, the heated atmosphere of today’s market, and the excitement of finding a possible new home can exert a great deal of pressure. Do NOT let that pressure be what decides whether you waive or not – do your homework first!
Rona Birenbaum is a certified Financial Planner and is licensed to do financial planning. Rona is registered through separate organizations for each purpose and as such, you may be dealing with more than one entity depending on the products purchased. Rona is registered through Caring-for-Clients for financial planning services. This website is not meant as a solicitation for financial advisory services. Financial advisory services are available through the facilities of Queensbury Strategies Inc. Financial Planning is not the business of or under the supervision of Queensbury Strategies Inc. and Queensbury will not be liable or responsible for such activities.