So you’ve been house hunting for a while, you’ve finally found the one you love and you’re ready to submit an offer. When your Realtor puts together the Agreement of Purchase and Sale (APS) for the property, you’ll have to decide what terms (for example; your offer price, or closing date) and conditions will be in the offer.
To better clarify a condition in an offer can be described as “a requirement that is fundamental to the very existence of the offer”. Should a condition not be fulfilled (breached) it would allow for the Buyer to get out of the contract and retain their full amount of their deposit back. There are tons of conditions that can be included into an Agreement of Purchase and Sale, the most frequent one used being the financing condition.
Should you have a Financing Condition? By including a financing condition in the Agreement of Purchase and Sale you are giving yourself time to arrange for appropriate mortgage financing before you have a firm lender in place. Usually fulfilling the financing condition is as simple as returning to your mortgagor and having them begin the final approval process. Should something not go according to plan during the conditional period (for example; you couldn’t get the financing you expected) you will be protected by your financing condition, which means that the deal would become null and void and your deposit would be returned to you.
Now a days banks are typically looking to approve someone for a mortgage on a particular house. They want to make sure that the house is worth what you paid. Your lender would than order an independent appraisal of the house and lend you money based on that appraisal. Should the numbers not stack up for them, you will be protected by your financing condition. A financing condition will typically last 3-5 days which will give you enough time to sort things out with your lender. After that time period, you will sign a ‘fulfillment of condition’ or a ‘waiver’ which will mean that your offer will no longer be dependent on your finances.
The Risks As important as the financing condition is there are situations where Buyers will choose to waive their financing. One example being; that the Buyer is in competition and wants to make their offer more attractive to the Seller. If you waive your financing condition and are unable to complete the purchase transaction, you will forfeit your deposit (which isn’t very fun). Something even worse though, if you’ve really annoyed the Sellers and if they can prove that your breach of contract caused them damages over and above the amount of your deposit, they can sue for additional damages.
The main point here is that waiving your financing condition without having a firm lender commitment in place is taking a substantial financial risk, and it is not a decision to be taken lightly. Please take note. Although your financing condition gives you a legal “out” of the APS, you still have a duty to seek financing in good faith. This basically means that you can’t just decide you don’t want the house anymore and try to back of the deal saying that you couldn’t get financing.
Know the Difference: Mortgage Pre-Qualification Vs. Pre-Approval
Being Pre-Qualified for a mortgage basically means that you have supplied a lender with a basic financial picture (debt, income and assets). After evaluating this information, a lender can give you an idea of the mortgage amount for which you qualify. Because it’s a fairly quick procedure, and based only on the information you provide the lender it’s not a sure thing.
With a Pre-Approval the lender can tell you the specific mortgage amount for which you are approved. You’ll also have a better idea of the interest rate you will be charged on the loan and, in some cases, might be able to lock-in a specific rate. To help you remember Mortgage Pre-Approvals are in writing (usually for 90-120 days).
If you find yourself in a bidding war there are ways to be fully approved by your lender before you make an offer. This will allow you to make your offer without a financing condition.