Do I Need a Finance Condition?
A question that gets asked in uber-competitive markets like ours is “Do I need a finance condition?” or, put another way “Can I Purchase Without Conditions?”
The shortest answer is “Sure, you can.”
You can do whatever you want - as long as you understand the risks and are making an educated and informed decision.
Let's put it another way. “Can I jump out of an airplane at 10,000 feet?” Yes, absolutely you can, but if you do, we both know you are taking on more risk — and hopefully you have prepared for it before taking the leap.
People have different tolerance for risk. If you are not comfortable with the uncertainty of submitting a 'firm' purchase offer, this may not be for you.
While it's no secret in the current real estate market that purchase conditions are seen as negatives by many Sellers, it's still important that your decisions reflect your comfort levels because in a condition-free offer, there are no guarantees.
Think of offer conditions as your parachute (or wingsuit). Normal conditions often include financing, home inspection, sale of your current home and review of condo documents. They are put in place to protect you as the Buyer.
Yes, it's true that with my past experience I can probably give you my professional opinion of the chances of successfully obtaining an approval ...BUT.... anything can happen.
For example, the house you fall in love with could turn out to be a former grow op or an appraisal could come in below the purchase price. Maybe you find out through the condo minutes that there's a huge assessment coming that the lenders won't like or you are unable to sell your current home before Closing on your Purchase?
Remember that submitting an offer to purchase without conditions means that you are committing to buy that property with absolutely no turning back. Basically, you're free falling without a parachute ... base jumping without a wingsuit ... and trusting that there will be a safe landing at the bottom.
But what about that Pre-Approval I got?
Great question. Pre-approvals are important steps in preparing to purchase. We need to understand, however, just what it is. We can start by focusing on the “Pre” part of the word.
A pre-approval qualifies the borrower at a single point in time for a specific borrowing amount. It does not review any details for any specific property. It is not reviewed by default insurers.
Lenders (and default insurers) only fully underwrite a live deal — they only issue the full, real approval, when they can review the borrower and the specific property purchase together.
Remember also that not all properties are equal under lending policy. Even when a borrower is vetted up front, the property could limit or eliminate financing opportunities. Things like 60 amp electrical service, pier foundation, co-ops, zoning issues, age-restricted properties, former grow- ops, structural defaults — these are all examples where financing becomes very difficult or disappears altogether. If a solution can be found, it tends to be very expensive.
If you submit a firm offer on an atypical/non-conforming property you could find yourself in a free fall and hurdling toward the ground more quickly that you'd intended.
How can I protect myself and still pursue this strategy?
There are ways to position yourself in order to submit a 'firm offer' more safely — these mitigate risks but do not eliminate them completely.
- Work with an experienced realtor. This is among the most important things you can do. Have your Realtor review recent sales of comparable properties so you have some confidence that if an appraisal is required, it will support your purchase price. (If the appraised value is less than your purchase price, you need to have the difference in cash, on top of your down payment and legal fees.)
- Ensure you have been pre-qualified/pre-approved. As an extra measure of safety, forward the MLS to your mortgage broker so they can look at actual numbers and review the listing for any obvious financing red flags.
- Consider having a Home Inspection done before submitting your offer — or review in detail any inspection completed for the homeowner, including contacting the home inspector who completed it to discuss the property.
- Be comfortable with and prepared (have strategies in place) for all worst-case scenario options (prepping a parent/family member to be a back-up co-signer, potentially increasing the down payment, or being prepared to go with an Alternate lender at higher rates and fees)
- Be extra cautious when you have less than 20% down. Why? Federal statute requires mortgages to be insured by one of 3 default insurers (CMHC, Sagen, CG) and if all 3 say no, then you're out of financing options. Increasing your down payment to at least 20% would be your only path.
Let's put this in perspective
What happens if you purchase without conditions and then can't make the deal work? Generally, it's goodbye deposit on the Purchase and hello potential lawsuit.
Damages can climb quickly! There are lost Realtor commissions. There are the costs of re- listing and new marketing efforts. If the sale price to a new Purchaser is below yours, you could be on the hook for the difference. If the closing date to the new Purchaser is later than yours was, there could be interest expense. And, if the Seller was depending on the Sale for their Purchase, oh dear. In short, it can get ugly real fast!
Submitting an offer to purchase without financing (or other) conditions makes it a cleaner and perceived stronger offer. Almost every Realtor will confirm that a 'firm offer' will have a better chance of being accepted than one with these dirty little conditions attached. They exist, however, for your protection and you assume all the additional risk when they are not part of your Offer.
I know it's tempting to press your Mortgage Broker for an iron-clad mortgage approval decision — for full consent - before making an offer without a finance condition. It's human nature to want 100% assurance that everything will be fine. But it wouldn't be responsible or professional to give assurances without also highlighting the risks.
We'll work with you to ensure you are aware of all steps you can take to mitigate your risks. In the end, the decision and responsibility for that decision is yours alone.
As Brokers we work for you and have a duty to ensure that you understand exactly what kind of airspace you're jumping into.
Questions? Let's Talk.
Jim Cook is a broker with TMG (FSRA 10315) and has been providing mortgage services in Bruce County and across Ontario for over 15 years. He has worked with thousands of Purchasers and homeowners, brokering some quarter billion dollars in mortgage volume. Contrary to the analogies used above, he has not experienced free fall flight, parachuting or base jumping in person… yet.