So you've seen a home? It looks good. It meets your criteria and now you're ready make an offer. But wait! Your Realtor has just let you know somebody else wants to buy the same home too. The question now is, should you make a firm or conditional offer?
Before you make a decision, it's important to make sure you understand the risks and potential hazards of making a firm offer to purchase..
The Firm Offer
When you make a firm, non-conditional offer on a real estate property, you’re choosing to purchase that home without the luxury of any buyer related conditions. Including those conditions most commonly associated to a home inspection, obtaining suitable financing or selling your own home. Should the Seller accept your offer, you become totally committed to completing the sale whether or not defects air found later in the home, your mortgage financing falls through or your own home doesn't sell.
With regard to financing, even a mortgage pre-approval or pre-qualification isn't 100% you'll obtain a mortgage. Mortgage pre-approvals and commitments from lenders contain conditions for approval and don't eliminate the risk you will incur when making a firm offer. (See Pre-approvals, not what you think it means)
Some typical risks buyers need to be aware of:
Property Value: What if the property you just bought does not appraise at the price you just purchased it for? Lenders will only lend on the appraised value. So on top of your down payment you may need to come up with the difference in cash. If you bought at your maximum approved mortgage amount, you could be in trouble.
First-time or High Ratio Buyers: Meaning your down payment is less than 20% of the purchase price. In this case by law, the mortgage must be insured against default by one of the big three mortgage insurers (CMHC, Genworth, Canada Guaranty) And these insurance companies have the final say whether your mortgage gets approved or not, and do not review mortgage applications until after a purchase is made.
Your Home Didn't Sell: Typically, you'll need the proceeds from the sale of your existing home along with the mortgage you were approved for to close and fund your new purchase. No sale, no mortgage.
Property Condition: Regardless of whether or not you have a home inspection, lenders require appraisals on the properties prior to funding the mortgage. If the appraisal or MLS listing show property defects, they may not fund the mortgage. Examples of defects lenders will not fund on: asbestos siding, 60 AMP electrical service, structural defects, location, etc.
Status Certificate for Condominiums: Regardless of whether you didn't include a condition for the supply and Solicitor's review of a condominium Status Certificate, the lender wants it. If the Status Certificate fails to satisfy the lenders' requirements (as well as the mortgage insurers' in some cases.) You will not get a mortgage.
Putting a buyer condition(s) in an offer provides the buyer the comfort of knowing they can to either move forward with the purchase or cancel the purchase should the terms of the condition(s) fail to meet with the buyers expectations.
In a sellers real estate market, buyers may be at a disadvantage when submitting conditional offers in a competitive offer situation. All things being equal, a Seller will most likely accept an offer for the most money with the least number of conditions or no conditions at all. The advantage for the Seller in the event he accepts a condition free offer, is his home is SOLD irrevocably up on acceptance of the offer.
If you plan on making a condition free, FIRM offer, understanding the risks and the legal implications to yourself should you fail to close on the purchase are important. Here are a few suggestions to help you mitigate the downside of a FIRM purchase should things go sideways.
Complete as much of your due diligence as you can prior to submitting an offer. For example, get a proper pre-approval or pre-qualification from a lender or better yet a mortgage broker so you know where you stand. If you're not asked to provide pay stubs, income documents and a Credit Report, move on to the next lender. Rate holds are not pre-approvals.
If there's time, try to arrange and pay for a home inspection prior to any offers. This also goes for requesting your own property appraisal. Sure there's costs but they're small in comparison to the costs of litigation and the possible loss of your down payment if you don't.
At the very least, have a "Plan B". What's that? Recruit a family member or someone that qualifies to go on the mortgage as a co-owner or co-signer that has the financial backing and even the extra cash if needed to be a part of the purchase.
Although expensive, short term private financing may also be an option if you already own a home. It's best to talk to a mortgage broker about your options as the have access to many more mortgage solutions and lenders than a bank may provide you.
Now with your new found knowledge, happy house hunting!
Written by Steven Porter. Steven was a Real Estate Broker for 30 years and now serves clients as a Licensed mortgage agent with Mortgage Architects, mortgage broker. For advice and service contact Steven Porter, Accredited Buyer Representative, Seniors Real Estate Specialist, Certified Luxury Home Mortgage Advisor and Certified Reverse Mortgage Specialist at 905-875-2582, steven@1800Mortgages.ca. www.1800Mortgages.ca
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