Now that we have new mortgage rules, it is more important than ever before to include the financing condition in any offer or be otherwise prepared for the consequences.
Pre-approvals are no guarantee your buyer will obtain financing.
Too many buyers are cavalier about submitting offers without a financing condition, especially during the pressure of a bidding war. They must understand that even with a pre-approval, the lender must be satisfied with its own appraisal. The foundation for most appraisals is, what would a willing buyer pay a willing seller, WITHOUT pressure?
In a bidding war, there is almost always pressure on the buyer.
This is why the appraisal will likely be lower than what the buyer offered and the lender will offer your buyer less money than they hoped for. The answer is always to have an extra five to 10 per cent of the down payment in reserve to protect themselves. In a condominium purchase, if it is conditional upon review of a status certificate, use that time to also make sure their financing is in order.
Lenders can change their mind right up until the day of closing.
Even if your buyer is approved after they sign the agreement, the lender can still change its mind based on anything that they may learn before they advance the funds. There are usually many conditions attached to any loan approval, such as verification of income, down payment and employment. Make sure your buyer works with their mortgage broker to satisfy all of these conditions and requirements as soon as possible in the process.
The worst words a lawyer can hear from a lender on the day of closing is “The file is in underwriting”. This typically means that someone else is reviewing the entire file because issues have arisen. In some cases this can result in the entire loan being cancelled, right on the day of closing. In our firm, since we receive and send funds via wire transfer, we are fortunately able to complete deals even when lenders are late transferring funds to our trust account.
Always know the net amount your buyer will receive from their lender.
Every mortgage commitment is different. Some may contain up-front fees for arranging the loan, appraisals, CMHC fees and PST, and interest to the interest adjustment date. All of these fees are deducted right off the top, before the balance is sent to their lawyer on the day of closing. The bottom line is that your buyer must know the exact amount that will be sent to their lawyer on closing, to make sure they have enough to make up the rest of the down payment, land transfer tax and legal fees. At our firm we remind clients to send us their mortgage instructions early in the process so that we can get them the net amount they will need to complete the transaction in a timely manner.
Get it in writing if your buyer wants no finance condition in the agreement.
If the buyer does go ahead and tell you to put the offer in without a finance condition, get these instructions in writing. It is not enough to write the finance condition in the offer and then have the buyer strike it out and initial it. It is better to use a separate form.
In Ontario, OREA has form 127, which makes it clear that the buyer is confirming to the buyer brokerage that they understand the risks in making an offer without conditions.