Whether it’s your first time buying a home or you’ve been through the process before, it’s important to know how using conditions can help (or hinder) you in making a successful purchase…
No two ways about it: buying a home, while exciting, is not without some risk. When you put down that initial deposit—usually around 5 per cent of the asking price in our neck of the woods—you expect to make it to closing. You see yourself entertaining in the kitchen, cuddling up with your significant other in the living room, or planting a herb garden in the backyard. What you may not anticipate are the complications that could, in some cases, make it difficult (if not impossible) for you to complete your purchase. That’s where home-buying conditions come in.
Put simply, the right conditions can reduce the risk associated with your purchase. Including them in your offer provides you with a way out if a worst-case scenario occurs. But they can also come with potential downsides, which means you should carefully consider the possible pros and cons before using them.
Before you make an offer on a home, here’s what you should know about home-buying conditions…
What are home-buying conditions?
In the simplest terms, a home-buying condition is a stipulation that must be met before a purchase can be completed. It’s a form of protection for the buyer, one that allows them to back out of the deal without losing their deposit under certain circumstances. When you make an offer, you can include as many conditions as you’d like—just be aware that doing so could make your bid less attractive to sellers.
The most common conditions
The concept of home-buying conditions is pretty straightforward, but how are they actually used? Here are two very common examples.
Home inspection condition
A home is a major purchase—if you’re like most buyers, it’s one of the biggest you’ll ever make! Going through with it when you haven’t had the property looked at by a professional can be more than a little nerve-racking.
If you add a home inspection condition to your offer, you can not only have the property you’re thinking of buying professionally inspected, but get out of the deal if you’re not satisfied with the results. You get to choose the inspector, review their report, and walk away or renegotiate the offer price if there are any significant issues. While a few buyers may see this as an easy way to back out of their purchase if they change their mind, you should be aware that the seller may be able to keep your deposit if there aren’t any material deficiencies found.
You may be worried about losing your deposit if you agree to buy a home and your mortgage doesn’t come through. It’s a valid fear! Fortunately, a financing condition can protect you if that happens. To understand how, it’s important to know the basics of mortgage financing.
First off, obtaining pre-approval isn’t the same as being fully approved. It doesn’t guarantee you’ll get the financing you need, but it’s still an important first step. During the process, a lender will comb through your information (your credit score, income taxes, etc.) to determine how much you’ll likely receive. Next, they’ll need to appraise the home you’re hoping to buy.
In most residential purchases your lender will finance up to 80 per cent of the value of the property you’re purchasing. If, after appraisal, the home’s purchase price is determined to be higher than its appraised value, you may need to make up the difference—in cash. That’s how the process usually works, but it’s different if we’re talking about a high-ratio mortgage. This is a type of loan where borrowers receive financing for more than 80 per cent of their prospective property’s value. Again, your purchase will be appraised before final financing approval is given.
What does all of this have to do with financing conditions? Put simply, a mortgage can fall through even after you’ve been pre-approved. It can happen if the value of the home you want is appraised at less than its purchase price and you can’t make up the difference or your mortgage insurer turns the property down. It can happen for a whole host of reasons, and having that financing condition in place means you won’t lose your deposit if it does!
Of course, there are many different conditions that buyers can use. Others can make your purchase contingent on a successful review of your status certificate (if you’re buying a condo) or the sale of your existing home. A word of warning, though. Home sale conditions are rarely used anymore—especially in hot markets like Toronto.
Should you include them?
The (perhaps slightly annoying) answer is, it depends. Adding conditions to your offer can weaken it, since sellers often see them as stumbling blocks. From their point of view, the quicker and simpler a sale is, the better. While most sellers will take all the elements of an offer into account (and money is usually the deciding factor), it’s best to improve your bid by removing as many conditions as possible—especially when there are others on the table.
So, how can you protect yourself without turning sellers off with unnecessary stipulations?
When it comes to forgoing your financing condition, the risk involved will depend on your circumstances. If you have perfect credit, dependable long-term employment and a large, cash down payment you’ll be in a better position to remove it. When in doubt, your best bet is to speak to your lender to get a sense of how confident you should be about obtaining your mortgage—and how it will impact you if you don’t.
Worried about waiving your inspection condition? There’s one solution that could provide some peace of mind. To attract as many offers as possible, some sellers will have a pre-listing inspection performed—and make the resulting report available to buyers. Reviewing a pre-list home inspection can help you make an informed purchase, or you could undertake your own inspection before making the offer.
As a buyer, you’re bound to be at least a little bit nervous before you make an offer on a home. On the one hand, you want to make your bid as attractive as possible. On the other, waiving your conditions could mean losing your deposit if something goes wrong. That’s why it’s so important to make sure you aren’t going into the process blind. If you’re feeling unsure about whether to forgo some or all of your conditions, speak to your agent about the risks involved.