In a previous blog, I discussed the importance of having a financing condition when buying a property. While the focus of most people is on the terms of the mortgage (i.e. interest rate, pre-payment conditions, length of the term, etc…) and the appraisal confirming the value of the property, lenders will often impose additional conditions to be satisfied in order to obtain financing. Recently, I have had numerous transactions where clients were unaware of certain conditions and struggled to satisfy them. As a result, lenders would not advance mortgage funds, closing dates had to be delayed, and a lot of additional stress was caused.
While this is not an exhaustive list, here are some examples of requirements that lenders may impose:
- Insurance: Every lender will insist that you have adequate property insurance coverage (e.g. in the event of a fire). This means that if you have a mortgage of $500,000 being registered against the property, the lender will require proof you have at least this much coverage or guaranteed replacement cost coverage (which means the insurance company will rebuild the home/building). Obtaining adequate insurance is usually not an issue for newer properties but can be for older properties (e.g. if they have old wiring or other risky characteristics) and secondary properties (e.g. a cottage).
- Property due diligence: While title insurance often results in lenders not requesting certain due diligence items, there are some cases where that is not the case. For example, if your property is on well and septic, the lender may insist on having a clean water sample and/or a well and septic certificate confirming those systems were properly installed. On the commercial real estate front, lenders may insist on obtaining a zoning and compliance report (to ensure the zoning for the property matches the us and that there are no outstanding permit issues), a report from the fire marshal (to see if there are outstanding issues related to inspections), or environmental testing of the property.
- Financial obligations: Your ability to regularly pay your mortgage on time is very important to your lender. If your lender encounters various debts when doing their credit checks, they may insist on having you payout (and close) certain accounts in order to obtain financing. This can include car loans, credit cards, or student lines of credit. Also, if you are separating from your spouse, your lender will likely insist on having a signed separation agreement to confirm not only the equalization payment, but also any ongoing spousal and child support obligations.
- Status Certificate: If you are purchasing a condominium, your lender will require that the status certificate for the property is acceptable. Each lender will have their own requirements (in one case, a lender once had an issue with there being asbestos in the walls of the building), but it is common for them to insist that there are no special assessments or ongoing legal disputes involving the condominium.
Purchasing a property can already be stressful and finding out there are extra hurdles to overcome late in the process can add to the anxiety. Suddenly finding out you have to payout your $10,000 car loan, get a water sample in a couple of days when the process takes longer than that, or that your lender has not found the status certificate acceptable (and there is nothing you can do to change that) is not something anyone wants to experience. So, make sure you review the mortgage documents closely and speak to your mortgage broker/lender before you commit to buying a property to ensure there are no last-minute surprises.