November 3, 2016

Should You Ever Drop Your Offer to Purchase Conditions?

Let’s say you’re on the hunt for your next home, or are a first-time home buyer. You’ve done your due diligence and have a mortgage pre-approval in place. There’s a home that you’re strongly considering putting an offer on – and your realtor asks if you’re comfortable waiving all the conditions in order to put forth your most competitive offer. But WAIT – what does it mean to waive the conditions on your offer – and what could be the consequences of doing so?

Why Buyers Are Dropping Offer to Purchase Conditions

To remove conditions from your home Offer to Purchase generally means forgoing the clause that you buying the home is dependent on:

• Securing your mortgage financing
• The house checks out from a home inspection (house) or status certificate (condo)
• The ability to view the property at least twice before the closing date to allow for an appraisal, and for you to make final measurements for window coverings, placing your furniture, or picking your paint colours

Not subjecting a seller to these conditions can make your offer more competitive compared to a buyer who will. In Vancouver and Toronto real estate markets, dropping conditions is commonplace; doing so will put your deal near the top of a property on a given property, especially when there are multiple offers placed on it at once.

The Risks of Dropping Your Real Estate Conditions

While entering an Offer To Purchase with no conditions makes you competitive, it could also put you at risk, especially if your pre-approval is not granted as anticipated.

For example, should your lender conduct an appraisal on the home you plan to purchase and finds its value is less than its price, it may not provide you with the full mortgage amount. Other common issues that can blow your budget include unexpected repairs and updates, such as replacing knob and tube wiring. Unpaid property taxes can also be a cost out of left field for unexpecting buyers.

The best tip to counter such issues is to have for a larger down payment, which can give you the financial wiggle room to close your sale.

Understanding Your Mortgage Pre-approval

A mortgage pre-approval is a basic, preliminary process where a mortgage professional will collect personal information such as your name, address, employer, yearly guaranteed income, and your down payment amount. Your credit report will be reviewed as well. If you do not have your Notice Of Assessment (NOA) then logon to the Revenue Canada website and order a PIN today (it takes up to two-week delivery time) as many lenders are now requiring NOAs.

Once a lender pre-approves your financing, they’ll provide a letter explaining how much mortgage a lender will lend to you, at what rate (locked-in up to 120-days), and what your monthly payments could be. This does not mean you should spend this maximum amount.

The pre-approval amount gives you a peace of mind when you are negotiating your comfortable home purchasing power.

In some cases, a pre-approval cannot be granted (only an approval), but it’s still important to seek a professional opinion. They include:

• If you’re new to Canada: Those who are looking to purchase who have not yet received their Permanent Residence status, must have a minimum of 10% down payment).
• You want a variable mortgage rate: These rates change along with the Bank of Canada’s prime lending rate, so it may change over time depending on economic factors.
•  Cases where high ratio insurance is needed (less than 20% down payment): A high ratio insurer does not provide pre-approvals as they need a property to “approve” along with the full borrower application.

Passing on Peace of Mind

A pre-approval is a tool that allows you, your mortgage professional, and your realtor to determine your comfortable purchase potential. Including a condition on financing in your Offer to Purchase gives you time to secure a lender “approval”, especially if you’re making a down payment of less than 20%, as there are other factors of the home purchase your lenders will want to review before granting final approval. Five to 10 business days is generally needed.

As you can imagine, in hot markets like Toronto, sellers simply aren’t waiting around for your financing to be guaranteed, which is why many are choosing to forgo it. However, you could find yourself legally vulnerable should your financing not come through after entering an agreement to purchase the home.

New mortgage rules that require high-ratio buyers to qualify at the Bank of Canada benchmark rate of 4.64% could further widen the chances of not being granted a mortgage approval for some buyers – it’s more important than ever to ensure the home is well within your affordability, and that you have a financial buffer to cover such a worst-case scenario.

Would you drop your financing conditions if it meant winning the perfect house? Share your thoughts in the comments.