“My Mortgage broker had me prequalified for a mortgage, but still says I should include a financing condition when submitting an offer to purchase a home. Why?”
Having a pre approval and adding conditions when buying a home is a good idea. And your mortgage broker telling you to do so is giving you a good suggestion. You have been pre-approved, but that’s not the same as being approved for a mortgage. Mortgage pre-qualification is only a temporary approval based on basic financial information.
Typically, a mortgage broker can pre-approve you for a mortgage based on a minimal amount of information regarding your financial situation, such as your income and down payment. Pre-approval will help when you start looking at properties as it tells you the mortgage amount that a lender would likely approve. Although it is not a guarantee, it will help you narrow down your property search to a certain price range.
When you find a home you want to buy, your realtor will help you to write an offer. You should listen to your mortgage broker’s advice and include a finance condition within your offer. A financing condition simply means your deal isn’t firm until you secure and mortgage and waive the condition. If you aren’t successful in getting a mortgage, you won’t waive your condition to proceed with the purchase, and there won’t be any legal consequences for not proceeding.
If the seller accepts your conditional offer, you will then have to apply for a mortgage. To do so, you will have to submit supporting documents (paystubs, T4, Letter of Employment etc.) and information about the property you intend to purchase (MLS Listing). The lender will then review your financial position and the information provided about the property.
The Lender will want to review the property, along with a number of other things. For example, is the property worth what you’re paying for it? Is it located in a flood plain? If you’re planning on buying a condominium, is the corporation in financial difficulty? Does the condominium have an appropriate reserve fund? Until you are formally approved, and the lender assesses the property, there is no guarantee you will receive a mortgage. The financing condition gives you a chance to secure a mortgage before finalizing the purchase.
Some buyers will feel comfortable proceeding without a financing condition, possibly to make their offer more attractive to a seller, but it’s rarely a good idea. A financing condition provides a bit of added protection. If you proceed without the condition and are not able to secure a mortgage, the seller may take legal action.
For more information on conditions read this article.
