The importance of a financing condition.

​Financing Conditions: I often get asked if financing conditions are necessary, and I will almost always say yes. I can pre-approve the client, but not the property. I can underwrite the file down to the dollar and pre-approve the clients, but mortgage brokers/bank employees can’t predict what the insurer or risk department at the bank will say regarding the home’s value, environmental concerns, or structural issues that the insurer might have record of.
 
With the bidding wars and purchase prices going significantly higher than City assessed value it is important to still include a financing condition, especially when clients are putting down less than 20%. When the client puts down less than 20% the insurer (CMHC, Sagen, or Canada Guaranty) will review the applicants and the property. If the insurer isn’t confident in the valuation of the home they could their own appraisal. If the appraisal came back short and the clients had a financing condition then at least they would be off the hook if they couldn’t get their mortgage in order. If the clients didn’t have a financing condition they would have to make up the difference between the insurer’s appraised value and the purchase price.
 
Example: Clients have 5% down payment

1. Purchase price: $400,000
2. Value determined by insurer: $370,000

In the eyes of the lender and insurer, the home’s value is $370,000 and everything would be set up at that value. The mortgage would be set up for 95% of the $370,000 value, meaning that the clients would have to put down 5% on the $370,000 and then make up the additional $30,000 out of pocket in order to purchase the house for $400,000. If they had the money then it could work out, but if they didn’t they would be in tough situation. When clients put down 20% then at least it is only the lender that has to review the deal, but in that case the lender may be ordering their own appraisal and the clients could still have to come up with more down payment then originally anticipated.