Conditional Financing: Why It’s Important When Buying a Home

Why you should understand your conditional financing options.

One of the side stories to the seemingly never-ending real estate boom in Canada’s major urban centres is the new records being set in multiple-offer bidding wars. Earlier this year, a five-bedroom “fixer upper” in the northern end of Toronto went on the market listed for $699,000. On offer night there were 72 bidders. In the end, the house sold for $1.366 million, nearly double the asking price.

With market conditions like these, would-be buyers often consider leaving out any conditions on their offers to make their bid seem more attractive. But there are some risks to leaving out the “offer conditional upon financing” clause. Here we look at some of the dangers of that strategy, and how you can buy your dream house without getting burned.

Financing 101

One of the first steps in the search for a home is to consult your bank or mortgage broker to find out how large of a mortgage you would qualify for. Typically, you’ll get that figure and a locked-in interest rate that’s guaranteed for three months, giving you time to shop around knowing your spending parameters.

But there’s a catch in that guarantee: your income may qualify you for a $750,000 mortgage, but your bank may not be willing to loan you that much money if their appraiser doesn’t think the house you bought is worth nearly that amount.

Avoid Overinflated Prices

Anyone who’s gone through the experience of buying a home knows it’s an exciting, but stressful, experience. Before making an offer on a house, you’ll visit it a couple of times, pour over the photos posted online, and start to picture yourself living there. Far too often (from the buyers’ perspective), people get so attached to a particular home and/or are so tired of losing out in previous bidding wars, that they decide money is no object. Thus, you get frenzied bidding wars with sales prices tens or hundreds of thousands of dollars over asking.

But bankers aren’t emotionally invested in the process. They just want to know that if you suddenly find yourself unable to make your payments, they’ll be able to sell the place and get their money back.

Leave Emotions Out of It

As a buyer, you have to try to minimize the emotions on offer night, particularly if the bidding is expected to go high and you want to leave out the financing clause. Many homes are put on the market with intentionally low prices in the hopes of creating a bidding war. When calculating how much you’re willing to pay for a house, get an accurate sense of what similar neighbouring properties have recently sold for. (Your agent can and should provide you with recent nearby sales data.) If the bidding starts to skyrocket above that figure, step away before you step into a potential financial landmine.

Know Your Offer Options

Another common clause is to make the sale conditional on a home inspection, the idea being that if the inspector discovers a major defect – say, a roof in need of major repair – the buyer can renegotiate the price, or walk away from the deal.

But if there are multiple offers on a house, the seller may be willing to take a slightly lower price from a bidder with no conditions in order to finalize the sale immediately.

If you’re keenly interested in a house, but have some concerns over structural or mechanical issues, ask the owner if you can arrange your own home inspection prior to offer night. My wife and I spent more than $1,000 on inspections for homes we did not end up buying in the end. But we consider it money well spent as it steered us away from making on offer on one place, and enabled us to put in a “clean” offer on the one we live in now.

You can also help set yourself apart from the crowd by including a higher-than normal deposit cheque with your offer – it shows you’re serious – and being flexible with the closing dates. But you should also investigate bridge financing if there will be a lag between the closing dates of the house you buy and the one you’re selling.

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