There are many ways to cause yourself stress and frustration in a real estate transaction. Failing to properly set an adequate condition of finance when drafting an offer to purchase is one of the easiest ways to send your stress meter through the roof (as well as the stress meter of the professionals helping you).
Conditions of financing on an offer to purchase is a contractual stipulation that the real estate transaction will not occur unless the buyer is able to first secure mortgage financing for the agreed upon price within the agreed upon time frame.
Conditions of finance protect the buyer and their deposit by giving them the right to retract their offer if they are unable to secure suitable mortgage financing in time. Since mortgage financing depends on a number of variables related to the property being purchased, in addition to the personal financial situation of the buyer, it also protects the buyer from certain undisclosed property related issues such as title defects, or past illicit activity.
From a seller's perspective an offer to purchase with conditions may seem on the surface less desirable than an unconditional offer since they will have to wait until the conditions are waived or the deadline passes to know whether the sale of their property is firm or not. However, an unconditional offer to purchase does not mean the deal will not fall through. If an unconditional deal falls through because the buyer could't get the financing that they assumed they could, this could mean a lot of headache for the seller as well as everyone else involved, and could even lead to a lawsuit.
Conditions of financing are like an insurance policy on your offer to purchase to help you manage the risk of false assumptions about your ability to mortgage qualify, or the ability of the property to qualify for that matter. Even if the perceived probability of not getting a mortgage is very low, the potential consequences could be catastrophic. Like wearing a helmet, you might not need it 99% of the time, but you'd be incredibly thankful you had it for that 1% of the time.
When setting a condition of financing deadline its important to remember that this condition is here to protect you the buyer, so don't cause yourself stress by making the deadline too short. The seller and possibly even your realtor might urge you to make the deadline short or risk losing the deal. Remember that a good deal is a fair deal and it should be in both the buyers and sellers interests to make it happen, even if it takes an couple extra days of due diligence to go firm. If it seems too good to be true, it probably is, so avoid hasty decisions and allow yourself the time to get your finances in order. (please note: the conditions deadline is not the closing date)
Generally we recommend setting the financing condition deadline to 10 business days after the seller accepts the conditional offer, rather than a specific date. That way if you make an offer on a Wednesday and the seller doesn't accept until Friday afternoon, you haven't inadvertently cut your deadline in half.
Once a mortgage application has been submitted, there is quite a bit of back and forth and document collecting that goes on, which can take time depending on the complexity of the file. Once the lender that your mortgage broker has submitted your application to has reviewed the file and it meets their preliminary guidelines, they will offer you a conditional mortgage commitment. Like the conditions on the offer to purchase, a conditional mortgage commitment stipulates that funding will not be guaranteed until all of the conditions have been satisfied. Usually these conditions are documentation conditions such as verification of employment and bank accounts, or proof that taxes are paid.
For absolute certainty and peace of mind, its best to wait to waive your condition of financing until all buyer related mortgage conditions are fully satisfied and accepted and your mortgage broker tells you that you are free to waive your financing condition.
8 Steps to Submitting a Conditional Offer to Purchase:
- Decide that you want to buy a property.
- Talk to a mortgage broker and get pre-approved so that you know how much you can likely afford and any potential challenges.
- Talk to a real estate agent and find a property that meets your requirements and is within your pre-approved price range.
- Submit an offer to purchase that is conditional on financing.
- Go back to your mortgage broker with property details to formally submit and application for a mortgage.
- Once you receive a mortgage commitment, work with your mortgage broker to satisfy any outstanding lender conditions before your condition of financing deadline.
- Once all of the mortgage conditions have been accepted by the lender, your mortgage broker will tell you and your real estate agent that you are free to waive your condition of financing.
- After you waive all conditions, the purchase contract becomes firm and binding.
The 3 Stages of a Mortgage Approval
An initial assessment or discovery call is usually the first interaction you'll have with a mortgage professional. During this informal discussion you will be asked a number of questions about your financial situation and real estate objectives with the goal of determining whether you could likely qualify for a mortgage and any obvious show stoppers. If all looks good on the surface the next stage is a pre-approval.
A pre-approval is a more thorough review of your personal financial documents with the goal verifying the information discussed in the initial assessment. It is important to note that once you are pre-approved, the property that you choose to buy must also conform with certain qualification guidelines before financing can be fully approved. We consider a pre-approval to be the bare minimum requirement to go out house shopping and submit a conditional offer to purchase. A pre-approval should give you a clear idea of what you can afford and any obstacles that you will have to navigate.
Only once a specific property has been selected and an a conditional offer negotiated can a mortgage application be submitted for a full mortgage approval. It is important to understand how the mortgage approval process and timeline fit into the home buying process, so that you can manage expectations and set your condition of financing accordingly.
Far too often we deal with the stress caused by tight or non-existent financing deadlines and the pressure that puts on everyone involved. As with all things in life, failure to plan is planning to fail.