So you’ve found the condo or house of your dreams and you want to make an offer. The Agreement of Purchase and Sale (or AP&S) is the official document that includes the terms and conditions of your offer. Do you need a financing condition?
A condition is defined as “a requirement that is fundamental to the very existence of the offer.” A breach of a condition allows the Buyer to get out of the contract and obtain the full amount of the deposit back. There are limitless types of conditions that might be included in an AP&S; one of the most important ones to understand is the Financing Condition.
The financing condition protects a Buyer. While the legal wording of the clause may vary, it essentially tells a Seller that your offer to buy their property is conditional on you obtaining financing. A well-worded financing clause will state that the financing you obtain must be “satisfactory to the Buyer in their sole and absolute discretion;” meaning that the terms and conditions of the financing obtained (interest rate, payments, etc) must be satisfactory to you – not just that you were able to obtain financing from someone at some imaginary rate.
If you buy a property without a financing condition and then realize that you can’t find a lender to lend you the money, you’ve got trouble. Or maybe you find out your credit isn’t as good as you thought it was and the bank is penalizing you by charging you a higher interest rate and you can no longer afford the mortgage payments. A financing condition can protect you from losing your deposit and being sued, by giving you an ‘out’ if you need it. Of course if your offer is conditional on financing, you have a duty to seek financing in good faith (meaning you can’t just change your mind about the house the next day and back out of the deal saying you couldn’t get financing).
Mortgage Pre-qualification vs Pre-approval
People often mistake being pre-qualified for a mortgage for being pre-approved for a mortgage. Being pre-qualified means that a lender has determined how much mortgage you can afford by looking at how much money you make and what your debts are and applying their fancy ratios. They have not likely confirmed what you’ve told them (with credit checks and employment confirmation letters), nor have they guaranteed you an interest rate or mortgage terms.
Mortgage pre-approvals are in writing – so if you don’t have something in writing (probably valid for 90 or 120 days), then you aren’t actually pre-approved. Having a financing condition in your offer gives you the opportunity to confirm everything with your lender and is one of the most important ways of protecting yourself.
These days, banks are often looking to approve people for a mortgage for a particular house – they want to know that the home they are purchasing with you is worth what you paid. They may order an independent appraisal of the house and will lend you money based on that appraisal. Again, a financing condition can protect you.
Financing conditions generally last for 3-5 days, giving you time to sort out your finances. At the end of that time period, you’ll be asked to sign a ‘waiver’ or ‘fulfilment of condition’ and your offer will no longer be dependent on your financial situation.
If you find yourself in a bidding war or some other high-pressure negotiation where financing conditions aren’t likely to be accepted by the Seller, there are ways of being fully approved by your lender BEFORE you make an offer, thus enabling you to make an offer without a financing condition. A good Realtor and lender can guide you through this process.