The Importance of a Financing Condition
Given the competitive market that exists right now, many buyers have unfortunately been on the wrong end of a multiple offer situation. Sometimes, buyers are unsuccessful due to their price being too low or their closing date being unattractive, but other times it is because they included too many additional provisions in their offer. As a result, potential buyers are doing whatever they can to make their offer more competitive, and that usually involves removing conditions and warranties. One concerning trend I have noticed recently, in particular, is buyers not including a financing condition in their offer.
A financing condition used to be standard in most agreements of purchase and sale. The purpose behind it is to give buyers time to consult with their lender and/or mortgage broker to make sure that they could arrange adequate financing for the property. In the event they are unable to do so, the buyers can normally get out of the deal without losing their deposit or being in breach of the agreement. Some buyers may think they do not need a financing condition since they have already been pre-approved by their lender. However, many buyers are surprised to learn that a pre-approval does not guarantee that a lender will provide financing for a particular property; lenders will often require further details about the property being purchased before agreeing to provide financing.
Often, the main concern for the lender is the value of the property. Some lenders will require an appraisal to make sure the value of a property is at least the same or more than what the buyers have agreed to pay for it. If the appraisal value is less than the purchase price, the lender may refuse to provide financing or may agree to loan a lesser amount than the pre-approval (on the understanding the buyers will cover the difference). Also, lenders will sometimes impose certain conditions that must be satisfied to obtain financing. Some common requirements include obtaining adequate property insurance, providing a clean water sample for a property with a well, and having the lender approve the status certificate documents for a condominium.
So, buyers should not look at their pre-approval as a guarantee but as an indication of what amount their lender will loan to them if they can satisfy certain requirements. Based on this, buyers should try as hard as they can to include a financing condition in their offer to purchase and discuss any requirements their lender may have before firming up their transaction.