The real estate market is more active and more competitive than any time in history. The results? Pure chaos.
It used to be normal for people to insert a few conditions when making an offer to purchase a home. The standard conditions used to be along the lines of obtaining satisfactory financing within 5 to 10 business days and obtaining a satisfactory home inspection. The lender would go through an in depth underwriting process, then verify income, down payment, credit, and finally the property would get reviewed and appraised to ensure it meets the lender’s criteria and lending value.
However, if you dare insert these today, your offer will most likely get put to the bottom of the pile of the other 10 to 20 offers and you won’t get any serious consideration.
Today, I’m seeing home buyers remove these clauses and just go in with a firm offer. They don’t list any conditions in order to better their chances of an accepted offer. So, should you do the same? Well, yes and no.
Let’s examine what could happen if you DON’T insert either of these clauses and when it’s okay not to insert any conditions.
EXAMPLE 1: The buyers have 20% down payment and can’t come up with any more.
So, they buy a home for $700k with no conditions. They have $140k for a down payment plus another $15k available for closing expenses like land transfer. Let’s say they are pre-approved for a mortgage of $560k. They budgeted for a mortgage payment based on a rate of 2.00% and an amortization of 30 years (you can go up to 30 years when putting 20% down or more).
But, now the problem begins. The lender approves their mortgage, but the lender’s appraiser says the home is only worth $650k. So what happens now?
It is likely that the lender will still lend the purchasers up to 80% of the appraised value of $650k without having to get the mortgage high ratio insured by Canada Mortgage and Housing Corporation (CMHC) or Canada Guaranty or Sagen. That alone is $520k. However, this means the purchaser will need to increase their down payment by another $30k and they don’t have it.
The lender can still offer to fund the mortgage based on a value of $650k. If the clients paid $700k, that extra $50k is not considered as part of the down payment. In our example, the borrowers have $140k available for a down payment. But, $50k of that is not going to be considered when doing the math.
So, the lender will use $90k of this as down payment. The lender will treat their down payment as $90k on a purchase of $650k. This works out to 13.8% down payment.
Additionally, CMHC insurance of 3.10% will get added to the mortgage or $17360, making the maximum amortization 25 yrs.
A mortgage payment on $577,360 is $2444 per month. However, it could have been a payment of $2067 per month on a mortgage of $560k with a 30 year amortization. The buyers end up with a payment that is $377 a month higher and a starting mortgage balance that is $17k higher. Going in with no conditions in this example is more costly for the buyers in the long run.
Let’s look at another example:
What if we have someone with more cash on hand or access to more money? Let’s suppose we had someone with 30% down using the same example. That means $700k times 30% is $210k. In this case, they would be able to handle and absorb any appraisal shortfall.
If $650k is the appraised value, that times 80% loan to value mortgage advance comes out to $520k. This would require a down payment of $180k. These clients would still have $30k left over. There would also be no CMHC fee and the amortization can still be 30 years.
My Bottom Line
If you have a substantial down payment of 30% or more, then you are in a better position to not include a condition of finance clause. It will now be easier to go in with no conditions.
However, as a mortgage broker, I cannot tell anyone to go into a purchase with no conditions. That’s just not prudent or responsible of me. Realistically, however, it’s happening everyday and that is the new norm. I’ll confess, I have also done this before during the 2016 hot housing market. But, I was okay as I had the resources to handle it.
The best thing you can do is get some advice. Speak with an experienced professional or mortgage broker to figure out what is the best way to go in your specific situation. Yes, I am happy to help, just reach out.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; firstname.lastname@example.org
As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.