To pre-qualify for a loan, the buyer submits its financial information, but the lender does not do a full credit check. Based on the buyer’s self-reported figures and the lender’s own formula, the lender tells the buyer how much money the buyer can afford to spend on a home. Pre-approval is more involved. The lender checks the buyer’s finances and credit and then issues a letter with an expiration date indicating the buyer has been pre-approved.
Even though a buyer in this market probably already has a pre-approval letter in hand, the buyer should still want the Financing Condition clause in the Offer to Purchase and Sale. Usually it gives the buyer a specific time period to secure the lender’s financing for the house in the offer. That’s different from pre-approvals because the house in the offer might not appraise for the amount the buyer has offered. If the buyer overbids for the house, the bank might not extend a loan for that entire amount and the buyer’s financing could fall through.
What Happens If a Buyer Waives the Financing Condition?
Unfortunately for a buyer, the lender does not always approve the home loan within the specified window. Buyers sometime find themselves in the position of waiving the Financing Condition before the lender approves. Most financing deals come through; however, it is nail-biting time for buyers. The consequences of not securing financing after having waived the Financing Condition are steep. If the lender will not finance the buyer’s entire offer, the buyer must scramble to find the additional funds or break the contract. Buyers who break sales contracts lose their deposits, but also leave themselves open to lawsuits for breach of contract.
Is It Ever OK to Forgo the Financing Condition Clause?
In the event of a bidding war for a terrific house, a real estate agent might advise a buyer to omit the Financing Condition to make the offer more attractive to the seller. Bidding wars can often push a buyer’s offer well past the seller’s asking price. Unfortunately, lenders might not support that higher price and refuse financing. If a buyer has enough cash on hand to cover the difference between his offer and the seller’s asking price and is confident that the house will appraise for the seller’s asking price, than leaving off the Financing Condition is a calculated risk. It is important to keep in mind that there is a risk and that a buyer might be stuck paying a lot extra out of pocket. We never recommend that the Financing Condition be waived until one has a written commitment for the needed amount of financing.
Get Legal Advice for Any Financing Condition Issues
People often say that the buying and selling of real estate are the largest transactions most people will ever make. The real estate solicitors at Mackesy Smye in Hamilton know the ins and outs of offers. They can advise you when you are considering waiving or omitting the Financing Condition. Click below to contact our offices today for a consultation about your real estate offer and its COF. Receive terrific advice and peace of mind.