Conditional on financing - aka the financing clause - Ingrid McGaughey Toronto Mortgage Broker

“Conditional on financing”: the most important part of your offer

Conditional on financing - aka the financing clause - Ingrid McGaughey Toronto Mortgage Broker

“Conditional on financing” – do I need this?

When you find the condo or house of your dreams, and want to make an offer to purchase it, do you need a financing clause? Unless you can pay cash for the home, then yes, you do. That little phrase, “conditional on financing”, is important protection for you.

Making your offer “conditional on financing”, buys you time – around 5 business days – to ensure that you are 100% approved for the mortgage funds you need to complete your purchase.  Your mortgage lender needs to feel as comfortable about the property as you do, and will likely conduct an assessment. After all, the property is the lender’s security if something goes wrong.  On top of that, it’s protection for you.  If there’s something in the financing that you’re not happy with, then you have the option of walking away, and getting your deposit back in full.

The lender may not like the property

Remember that in a pre-approval, you’re not yet telling the lender about a specific property.  Once you have bought something, the lender may decline the property for reasons such as:

  • The address may be outside the acceptable location perimeter for the lender.
  • The home might be appraised for less than the offer you’ve made, especially if you paid more than the asking price.
  • The lender might not like it for reasons like:
    • It’s a former grow op
    • It’s in a condominium with problems such as inadequate funds in the contingency account
    • It’s too rural or in bad shape (tip: be very careful when buying a property that is described as a “handyman’s special”, “renovator’s dream”, or “as is” in the MLS listing)
    • It’s a private sale

A pre-approval is a guideline only

If you’ve fallen in love with the home, it’s hard not to get emotional.  Don’t let the rush to buy overcome your common sense. Even if you have a pre-approval, it’s still only a guideline.  A lender doesn’t have to follow through on it (check the fine print, and you’ll see there’s lots of terms and conditions!), especially if your income or financial situation has changed.  The financing clause gives you time to confirm that everything’s cool with the lender, and to withdraw your offer if the lender’s queries turn up something negative about the house.

Protection for you, the buyer

A “firm” offer – one that is *not* conditional on financing – leaves you and your family on the hook. If your financing falls through, and you decide to walk away, you will lose your deposit.  You could even be sued by the seller.  That’s certainly not the happily-ever-after scenario you envisioned when you made your offer!

What to do if you DO want to put in an offer without a financing condition

If you really want to put in an offer with no financing conditions, make sure you discuss absolutely everything with your mortgage broker.  Things that I typically do in a situation like this include  reviewing the listing information, discussing the property with your realtor to do as much homework as possible on comparable properties, and contacting the lender about the property you’re looking at.  As well, I want to see all your income documents, down payment documents, and review potential scenarios with you to make sure we have a Plan A, Plan B and Plan C in place.  That way, if you do go ahead with a firm offer, you know what the potential options will be.   No surprises = stress-free homebuying!

Want to know more? Check out Pre-approvals made Simple, and my blog post on what first-time homebuyers should expect.

And as always, feel free to get in touch.


Photo [c] Іван Святковський for

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