The financing condition (aka. mortgage condition) clause gives buyers time to arrange for appropriate mortgage financing as well as the right to retract their offers if they are unable to do so. However in the hot Toronto market today it is not surprising that the vast majority of buyers waive this condition before they have a firm lender commitment in place. In today’s post we’ll outline the risks involved, and how to mitigate these risks.
First if you waive your financing condition and are unable to complete the deal, you will forfeit your deposit. Worse still, the seller can sue you for additional damages if your breach of contract caused them damages over and above the amount of your security deposit. This could happen because they were counting on your funds to complete a subsequent purchase of a property, or if they were unable to sell for the same price when they re-list the property.
However depending on your financial profile, if you've got pre-approved, accurately disclosed all pertinent information, and partnered with an experienced mortgage planner, then the likelihood of issues would be gauged.
Lenders normally require two conditions: income confirmation and appraised value. In the lending world, the ideal borrower’s income comes from a salaried job with two year+ job history. But if you are self-employed, or if your financing ratios are tight and you need every dollar of your income to qualify, you'd better to have your lender review your income documentation before signing back your financing waiver.
If you are making a substantial down payment on your property, then the appraisal condition presents should have limited risk because if a property’s appraised value comes in lower than the purchase price, borrowers just increase their down payment to cover the difference.
The other primary indicators of appraisal risk are location and the overall condition of the property. Appraisers rely heavily on comparable sales in the immediate area when estimating a property’s value. The fewer comparables there are, the more subjective the appraiser’s job becomes. If you have limited ability to come with additional funds, make sure your mortgage planner orders your appraisal as a first priority.
The rule of thumb is that the less flexibility a borrower has, the more important it is to work fast after signing the offer to ensure that all lending conditions are met prior to waiving the financing condition. An experienced mortgage planner should work with you to identify any red flags, and if there are any, to help you game plan accordingly.
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