When you are making an official bid to purchase a home, your first step will be writing up your “Offer to Purchase”.  Usually, you’ll be working with your real estate agent to put this together.  In the Offer, you will have the right to include several clauses that protect you in case things don’t work out.  Really, you’re protecting your deposit, so that you are entitled to get your money returned to you, in full, if you don’t feel your conditions were satisfied. The condition of financing, or COF, is one of the most common clauses you’ll see.

What is the financing clause or condition of financing?

With the COF, you’re saying that you are making an offer to buy the property as long as you are able to obtain satisfactory mortgage financing by a certain date.  In Toronto, Mississauga, and the GTA, we typically see 3-5 business day COFs.  If you’re unable to arrange for mortgage financing that you’re happy with by that date, you simply don’t waive the condition, and your offer lapses.  You get your deposit returned to you in full.

What if you waive your COF and then your mortgage financing falls through?

If you don’t proceed with the purchase of the property after waiving the COF (or you don’t have a COF in the first place), you forfeit your deposit if you don’t finish buying the property.  In addition, if you didn’t seem to be operating in good faith, and the property seller lost money as a result, you may also open yourself up to be sued for additional damages.  So if you’re considering waiving your COF, you should make sure you’ve covered all the bases.

Why might the financing fall through?

People often wonder why the financing might not work out, especially if they had a pre-approval.  Here’s why this could happen.  Either:

1) the lender is not satisfied that the value of the property is what you paid, as determined by an appraisal, or they don’t like the type of property you’ve chosen, such as a rural property, hotel condo, or that kind of thing,

2) your lender didn’t fully review everything about your financial situation – your credit, your income, or your down payment before this, and they’re not satisfied now that they’ve really looked at it, or

3) something about your financial situation has changed – for example, you’ve added a hefty monthly payment such as a car lease or another new debt.

In order to be sure that you have a firm commitment from your lender, you need to know that your lender has looked at your credit, reviewed your income documents, verified the documents for your source of down payment, and is happy with the property you’re purchasing.  If you don’t know whether all of these have been looked at and approved, and you don’t have any cash buffer to give you financial flexibility, you might not want to waive your financing condition!

When is it NOT okay to skip the mortgage financing clause?

This is a tricky question.  Particularly in hot areas of Toronto, the reality is that you are quite likely to be competing with other people to buy the property you want.  Your real estate agent may advise you to put in an offer that is NOT conditional on financing (or anything, for that matter).  In this case, I would advise you to tread carefully. 

Are you competing with other buyers in a bidding war situation?

Make sure you’ve reviewed your financing with a knowledgeable mortgage professional to see if there are any red flags popping up.   As noted above, dropping in on your local bank branch, giving them a rough idea of your income and down payment, and having them produce a “pre-approval” letter, may not be a “real” pre-approval.  A lender really does need to see your full financial picture for you to be sure you’ll get a commitment from them to give you money.

Are you offering more than the asking price?

As well, especially if you’re expecting to offer more than the property is listed for,  you’ll want to make sure you have a sufficient cash buffer in place to make up for any shortfalls.  For example, let’s say the lender has agreed to lend you 95% of the value of the property.   It was listed for $500,000, but you offered $600,000.  Your lender may ask for an appraisal to confirm the value.  If the appraiser reports that the house is only worth $550,000, your lender will give you 95% of that, or $522,500.  This means you need to come up with the remaining amount of $77,500, rather than 5% of $600,000, which would have been $30,000.

Have you previously had bruised credit?

Similarly, if you’ve previously had credit issues, such as a bankruptcy, consumer proposal, or collections, I strongly advise you to make sure to include a financing clause.   In this case, your lender is relying more heavily on the property being up to their standards.  As such, it is even more crucial that your lender gives a final stamp of approval on your property and everything else.   (For more details on “what to expect if you’re getting a mortgage after bankruptcy”, click here.)  Better to lose out on a property than to lose your hard-earned cash because your financing doesn’t work out.  There will always be another property, and chances are, you’ll love it even more.

So what do you think?  Would you waive your financing clause?  Or would you walk away rather than risking your deposit money? Please feel free to get in touch to chat.

Image credit: [c] Thanakorn Lappattaranan for vecteezy.com