Let’s cover off a fundamental in your Real Estate contract, and a critically important date for your Mortgage approval, condition of finance. Here’s what we’ll discuss below:
- Accepted offer to purchase (OTP).
- Condition of finance explained.
- Condition of finance waiver.
- The spotlight is still on.
Accepted offer to purchase (OTP)
Once you are pre-approved to confidently shop around for a Mortgage, you’ll eventually write an offer to purchase. This means, you and your Realtor will submit an offer to the selling party to purchase the subject property.
Within the contract you submit to the sellers, among many other possible contract conditions (possession date, home inspection condition, deposit amount, purchase price etc) you’ll include a condition of finance deadline. If the sellers accepts your offer, including all conditions of the contract, you now have a “accepted offer to purchase”. Congratulations! You have conditionally purchased the home!
Hold back the champaign for now though …we have to work to satisfy the conditions of your accepted offer to purchase!
The window of time between when your offer is accepted, and the condition of finance deadline, is when your Mortgage application is submitted to the Mortgage lender for approval.
A very high percentage of Real Estate contracts require approval from the Mortgage lender to borrow money to purchase the home. This is why there is a “condition of financing” deadline in Real Estate contracts that require Mortgage approval.
Condition of finance explained
When you write an offer on a property listed for sale, you include a initial deposit. You and your Realtor will determine the appropriate deposit amount. For example, say you write an offer to purchase for a $500,000 home with a initial deposit of $10,000. This deposit can become a part of down payment, and let’s the seller know you’re a serious buyer. The $10,000 deposit is refundable IF the conditions of your contract are not satisfied.
From the time your offer is conditionally accepted, until the last date all of the conditions in your contract are satisfied, your deposit is refundable. Once you have a conditionally accepted offer to purchase, your Mortgage application is updated with the specific property and contract details and submitted to a chosen Mortgage lender for approval.
If for some reason your Mortgage application is declined, you can let the seller know and receive back your deposit. If any of the other conditions of your accepted offer to purchase are not approved by YOU (the buyer), you can received your initial deposit back.
From the time of your offer to purchase is accepted, and your Mortgage application is submitted for review, your Mortgage file is in “live” underwriting. Underwriting means staff at the Mortgage lender are reviewing your income, down payment, credit, and subject property. Ideally, all of the conditions of your Mortgage file are reviewed and verified by the Mortgage lender. At this time, you can decide to waive the financing condition of your contract (or not)!
Condition of finance waiver
This is critical. Here’s why …the condition of finance is usually the final condition to be satisfied of your accepted offer to purchase. If the final condition of the offer is removed, your initial deposit becomes non refundable. Once this is complete, you have a “firm purchase”. The home is yours! Bust the champain out! There is still a check-list of items to complete before home possession, but a lot of the heavy lifting in your purchase is complete. Happy days!
Ideally, all of the conditions of your Mortgage application are reviewed, satisfied and communication is received back from the Mortgage lender BEFORE you waive the financing condition. My team and I then communicate the status of the completed file to you. But who ultimately decides to waive the condition of finance? You, the buyer!
The Mortgage lender is communicating all conditions are satisfied, and if you continue to move forward with the home purchase, the Mortgage funding will arrive on the planned possession date. The choice is yours to waive the financing condition.
Their are scenarios where not all financing conditions are met and a buyer still might decide to waive financing. This puts your initial deposit at risk of being non-refundable. Also, if you waive all the conditions of your accepted purchase contract, and ultimately do not complete all conditions of your Mortgage, there is exposure to losing your deposit and litigation from the home seller. I do not recommend this. However, here are some stories I’ve worked through with buyers who waived their financing condition without all conditions being satisfied with the lender.
Gift down payment. I worked with a client who purchased a home with a 60 day possession date. A large portion of the down payment was being gifted from her father. Her father did not want to liquidate his investments and send his daughter the gifted funds during the period of Mortgage approval review. All other Mortgage conditions were satisfied by the lender except down payment. When the time came to waive the condition of finance, the verification of gift down payment condition was not satisfied. Down payment funds still needed to be transferred to the buyer and reviewed by the lender. She trusted that her father would send her the gift money closer to her possession date. She decided to waive the condition of finance making her purchase firm and her deposit non-refundable.
Non probationary employment. I had a client of mine conditionally purchase a home while on probation at his new job. Know this, a part of income being eligible for Mortgage qualifying means confirmation of the applicants employment status is non probationary. The lenders view Mortgage applicants who are on probation riskier because their employers can terminate employment with less difficulty. In this particular clients case, my clients probationary period ended before their possession date. He decided to waive his financing condition without completing all income verification at the time of waiver. He decided to confirm his non-probationary employment status AFTER he removed his condition of finance.
In these two examples, do the buyers have options? Yes. The woman planning for gift down payment could wait until her father transfers the down payment money to her before writing her offer to purchase. The buyer who is on currently on probation could wait to conditionally purchase a home AFTER his probationary status is complete. In other scenarios where the condition of finance is not satisfied by the Mortgage lender, but is close to completion, an extension of the condition date is possible to negotiate.
All hands are “on deck” to ensure your condition of finance deadline is met on or before the actual deadline!! What do Mortgage lenders think of this deadline? They don’t care!
All the Mortgage lender cares about is all conditions of the Mortgage file be satisfied approximately 14 days before possession. If the applicant submits a letter of employment, confirming non-probationary employment status, after the condition of finance deadline – great. The lender does not care. The buyer, who’s money and much more, is on the line, is the one taking the risk when waiving financing without all conditions satisfied.
To be clear, I do not recommend waiving the financing condition without having all conditions satisfied by the Mortgage lender. However, I am willing to make time to explain the risks to my clients in an effort to help you purchase the home you want.
The Spotlight Is Still On
After you waive all conditions of your home purchase contract, meaning all conditions of your Mortgage application are satisfied, the spotlight is STILL ON YOU. Here’s what this means …
I recommend you DO NOT do any of the following before taking possession of your home:
- Quit your job or change your employment status (employed to self employed for example).
- Substantially change your credit position (borrow). No new vehicles, co-signing for other home buyers, significant credit card debt, purchasing new appliances etc. Note, you do not have to call and check with me if you can purchase gas or groceries on credit :-).
- Cancel or apply for any new credit. Sometimes couples migrate separate banking to one institution, in the hope of creating financial simplicity/efficiency. This is good – however this typically means cancelling one or more credit cards which is NOT good.
- Risk your down payment. Just keep your down payment money easily available to you and in existence.
- Go on vacation. Be available to meet with your lawyer, to sign the final Mortgage contract, in the two week period leading up to your home possession. Meeting with your lawyer requires ‘wet ink’ signing. In the depths of the COVID crisis, alternative plans for legal client signing were created. However, PLEASE plan to meet and sign with your lawyer about 14 days before your possession.
Status quo is our friend.
The spotlight is off when you take possession of your home. Remember to make your Mortgage payments in full and on time. Having a missed Mortgage payment on a client’s credit history is very, very bad.
Conclusion:
The condition of finance deadline, and ultimately the waiver of this condition, is critically important. The condition of finance deadline can be used in contract negotiation, and is usually the final piece to your firm home purchase.
Sellers who have a firm sale (their buyer waives all conditions of their purchase contract) now have finalized numbers to move forward with their next purchase. The connected domino chain of buyers and sellers can become very long with each relying on the conditions of the first buyer to be locked and in place (firm).
I hope this is a helpful fundamental explanation of a very important part of your home purchase and Mortgage approval. I look forward to helping you purchase your next home!!
Talk soon,
Chad Moore
