Should I Waive my Financing Condition?
It would be nice if the answer to this question was as simple as black or white; but it's not. In a perfect world, a homebuyer would include a condition of financing (COF) when drafting their offer to purchase with their realtor. This is a clause that provides them the time they need to arrange for appropriate financing or to retract their offer should they be unsuccessful in doing so. As this type of transaction typically involves some sort of borrowing, it isn't surprising that a condition of financing is common practice.
Of course, we are not living in a perfect world and the real estate market is incredibly competitive currently. The result is that more and more buyers are putting in offers and waiving their Condition of Financing without having a firm lender commitment in place. There are inherent risks to this of course, so let's review them together.
Let's start with the worst-case scenario; you've waived your financing condition and now you cannot complete the purchase transaction. The first thing you need to know is that you may be forced to forfeit your deposit. What's worse, is that if the seller can prove that the breach of contract has caused damages over and above the amount of said deposit, they can sue you for those additional damages. It's also important to note that having a pre-approval in place before you put in your offer is always recommended; however, a pre-approval is not a guarantee that your financing request will be approved.
There are some key things you can do to minimize the risk when waiving your COF. First, get pre-approved and accurately disclose all pertinent information. Use an experienced mortgage professional, like me, who can help assess any issues that may come up.
There will likely be Lender conditions that will need to be met in order for your financing to fund (close). Many are quite easily satisfied (provide a pre-authorized debit form on the account you wish your payment to go through, provide the name of your solicitor); others, like confirmation of income and an appraisal are more complex.
Confirmation of Income
There are many facets to how income is confirmed depending on how you earn it. In the lending world, a salaried income from an employer you've been with for a year or more, is ideal. When you earn your income from commissions, part-time employment or are self-employed, things tend to get a little more complicated.
Commissioned income, part-time income and bonuses are considered variable income. A two-year average will be considered in these instances. Self-employed income can be handled in a variety of ways depending on the lender and whether they permit for adjustments such as add-backs.
In the end, it all comes down to your debt servicing ratios. If the numbers are tight and you need every penny of income in order to qualify, your mortgage professional should go over every detail of your income and supporting income documentation with the lender before you sign off to waive your condition of financing.
We've all heard people exclaim "my neighbour just sold their house for "insert amount" and my home is much "insert adjective" ". While comparables help to give you an idea of what you can expect to pay for a property, lenders want a more substantiated opinion. Most lenders will obtain that second opinion by using an Automated Valuation Tool; or by requesting a full-appraisal done by an appraiser known to them. The lender will use the lower of the purchase price or appraised value when considering how much they will lend.
If a full appraisal is required by the lender, many times the the appraisal conditions are not met before the Condition of Financing are waived; and again this comes with risk. You may be required to pay for a high-ratio loan if the property value comes in lower than the purchase price and you're making a sizeable down payment. However, if you are making a smaller down payment, you will need to increase the size of that downpayment to make up the difference. If you have limited resources, the risk is greater that you won't be able to come up with the extra funds to meet the difference in values.
There is also a risk that the appraiser finds a specific issue with the property. When this happens the lender may still be willing to proceed, depending on the extent of the issue, on the condition that a portion of the mortgage funds are held back until the issue is corrected, and the borrower provides confirmation of such. Once the confirmation has been provided, the lender will release the funds that were held back.
At the end of the day, while waiving your Condition of Financing before you have a lender commitment is common practice, you are opening yourself up to significant risk by choosing to do so.