As a buyer, you may have been pre-approved and feel that it is safe to buy unconditionally only to be caught up by a lender’s requirement that you cannot meet. At the last minute, you may even have to come up with a larger down payment. If you are unable to do so, this could leave you not only losing your dream home but potentially subject to the consequences of a breach of contract.
As a seller, an unconditional offer is always very appealing but if that buyer cannot produce funds on closing the results cannot only be heart breaking, but you may be faced with losing the home you hoped to buy and possibly being in breach of your contract with the seller of your future home.
As a Realtor® I always strive to guide my clients with good advice and protect them from making a mistake. I know that when a buyer finds the perfect home or cottage they want it and don’t want to be outbid. My job is to be the voice of reason. Unless you have the resources to buy with cash or a very large down payment that well exceeds most lenders’ requirements, a financing clause is simply the best option.
In a recent article Mark Weisleder a Partner, author and speaker at the law firm Real Estate Lawyers.ca LLP covered the following important points.
1. Pre-approvals are no guarantee you will obtain your financing
Too many buyers are cavalier about submitting offers without a financing condition, especially during the pressure of a bidding war. You 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 you less money than you hoped for. The answer is always to have an extra 5-10% of the down payment in reserve to protect you. In a condominium purchase, if it is conditional upon review of a status certificate, use that time to also make sure your financing is in order.
2. Lenders can change their mind right up until the day of closing
Even if you are approved after you sign your agreement, the lender can still change their minds based on anything which they may learn before they advance funds. There are usually many conditions attached to any loan approval, such as verification of income, down payment, employment. Make sure you work with your 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.
3. Always know the net amount you will receive from your lender
Every mortgage commitment is different. Some may contain up-front fees for arranging the loan, appraisals, CMHC fees and HST, interest to the interest adjustment date. All of these fees are deducted right off the top, before the balance is sent to your lawyer on the day of closing. The bottom line is you must know the exact amount that will be sent to your lawyer on closing, to make sure you 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.
In Muskoka lenders sometimes have requirements for additional documentation. Things like water potability certificates, septic use permits, proof of properly installed water treatment (disinfection) systems, road access agreements to prove year round access, final occupancy permits and zoning even an inspector’s statement regarding the type of wiring and insulation. A mortgage can’t be advanced without insurance on the property, so a W.E.T.T. inspection may be necessary for wood burning devices. Ultimately the underwriter at the lending institution is responsible for making sure that the lender’s investment is protected. Sadly, they are not concerned with how much a buyer loves a property or how much the seller needs the transaction to close.
I hope that after reading this you will be cautious when buying or selling a Muskoka home or cottage. A good Realtor® will always put the interests of the client ahead of their own and encourage you to use a financing clause if there is any possibility you may need one.