Financing Conditions: The view from both sides of the fence.

A financing condition is common in most residential real estate offers these days.  To be honest, I don't write up an offer that doesn't include the condition.  Even when my buyer(s) is in a position to proceed without one I always ensure that he/she is the one to physically strike out the condition while making sure they understand the ramifications of proceeding without the condition.  

What does a financing condition do?

First of all, it depends on who is writing the condition, so always have your agent review the condition with you prior to making or accepting an offer.  The way that I write the condition is as follows:

  • The offer becomes conditional on the BUYER(s) arranging suitable financing for the property at todays current rates;
  • The buyer will have X days to do so; and,
  • If the buyer fails to receive financing in X days then the deal becomes null and void [doesn't exist] and the deposit is returned without any deductions.

Therefore, the condition provides the buyer(s) with time to make sure that they can purchase the property for the agreed upon amount.

I know I'm good for the money, so why use the condition?

Just because you know or have been told that you qualify for the funding does not mean that the property will.  When the lender looks into your application they look at the entire situation.  They need to be sure that the property can be sold to cover the debt in the event of a foreclosure.  In other words they need to be sure that the property is worth what it is selling for.  On some occasions the lender will order an appraisal to check the value.  If it comes back at, or above the selling price, you're good to go.  If it comes back low, you will need to come up with the difference prior to closing which could be thousands of dollars.  So, thats why.

As a seller, how should I react to seeing the condition on an offer?

As a seller, especially here in Woodstock, you shouldn't be alarmed.  Like I said before, most offers are going to include the condition.  That said, during an offer presentation it is a fantastic idea to have your agent do a little bit more digging on your behalf.  Asking some important questions could save you a lot of time and potentially keep you from accepting an offer that you shouldn't be accepting.  Questions like:  

Is the buyer(s) pre-approved?

If the answer is no or I'm not sure, it would be a very good idea to keep digging.  Faster the better. 

Who is your lender?  

As a seller you want to know that the buyer is using a reputable lender.  If they aren't, there is a good chance that their pre-approval is next to worthless and, even if they get the approval, there is a higher likelihood of problems on closing.  Local lenders know local lawyers and speak the same language which, more often then not, leads to a smooth transaction.  

Did the buyer(s) submit all of their necessary paperwork when getting the pre-approval?

Believe it or not, not everyone knows exactly what they make in a year.  Often times, people think they make more than they really do and it can sometimes take a mortgage application to uncover the truth.  This is why it is nice to know that your buyer(s) has actually submitted their pay stubs and T4's to the lender rather than simply telling the lender that they made X last year.  

 

These questions, along with others that are similar, can tell you a lot about an offer.  Sometimes even enough to pass on what appears to be a solid offer at first glance.  As a seller, you don't want to tie your property up with an offer that isn't going to fly.  Especially early on in the marketing process when your listing is receiving the most attention.  Asking these questions and understanding the answers can be the difference between selling for top dollar while your the listing is in it's prime and ending up with a stale listing that requires a price reduction to sell.  

 

Thanks for reading.

Comments always appreciated.

 

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Devon Young

Devon Young

REALTORĀ®
CENTURY 21 Heritage House Ltd., Brokerage*
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