The importance of financing conditions
So you’ve found the condo or house of your dreams and you want to make an offer. The Agreement of Purchase and Sale 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 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 ‘ fulfillment 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.
| Down Payment | Premium |
| 5% | 2.75% |
| 10% | 2.00% |
| 15% | 1.75% |
| 20% | 1.00% |
MONEY-SAVING TIPS
• The decision to grant credit and the interest rate you can successfully negotiate will be strongly influenced by your past credit history. The best thing you can do is avoid debt as much as possible, always pay your bills on time, do not charge your credit limit up past 75% of what’s allowed, and the less you inquire for credit the better.
• Ask your lender for details in the trade-off between slightly higher payments and a shorter amortization. For some buyers with good budgeting skills, ask what the payments would be over a twenty-year amortization instead of twenty-five. In return for slightly higher payments, you could shave five years off your amortization, build equity in your home faster, and be well on your way to being mortgage-free sooner.
• Take advantage of any prepayment privileges your lender will allow. Treat your regular payment as a worst-case scenario in which it will take twenty-five years to pay off your mortgage. Any extra payments you make go directly into your pocket, because every dollar you pay over and above your regular payment goes directly to the principal. That means, whenever possible, a few hundred dollars here and there can quickly add up to a few thousand saved later on.
