Financing Condition - Why You Need One When Purchasing
July 19, 2017 | Posted by: Shayne Beeler
Financing Condition – Why You Need One When Purchasing:
I’d like to clarify the difference between a “pre-approval” and an “unconditional mortgage approval”. It starts with the definition of a mortgage in the first place: a loan secured by property. A pre-approval determines your qualification options based on credit, down payment and income plus other factors (examples of other factors could be properties already owned, support payments owed, etc.). The most diligent form of a pre-approval would be involving documentation in the process of confirming those criteria. Why would we involve documentation that early in the process? Accuracy – we know what the official approval process on a property requires including the documents the lender will ask for during the process. By beginning with the end in mind, we can ensure a smoother process. Our goal here is to ensure once you’ve found “the one”, that we don’t meet surprises while attempting to secure the official mortgage approval. Especially if these surprises could have been dealt with at the beginning of the process. In summary, we want to avoid someone looking at 20 different properties, only to find out they wasted all of that time shopping in a price range they wouldn’t have qualified for based on the documentation lenders required to complete the approval.
So if we’ve been diligent during the pre-approval stage, why do we need a financing condition? Once again, even with airtight documentation, we’re back to the definition of a mortgage - a loan secured by property. The property and conditions of the purchase agreement absolutely matter to each and every lender. While you may be 100% approvable as an applicant, there is such a scenario where it’s the property that the lender won’t approve a mortgage on regardless of who the applicants are. Examples in this case – condominiums that have had known management or structural issues, homes with defects that come to surface during the approval process, properties that fall under different zoning, etc. These things matter to the lender because they impact the “security” of the mortgage. This doesn’t mean we encounter these scenarios all the time. However, the fact that they do surface from time-to-time requires an approach where we’re protecting ourselves through the approval process. To clarify, if an issue comes up and you don’t have a financing condition, in the worst-case scenario you may have contractually committed to a purchase that you’re unable to secure financing for.
So what’s the solution? It’s actually quite straight forward – if you’re not “paying cash” and your purchase requires a mortgage/any type of financing to complete, a financing condition gives us the chance to secure a complete mortgage approval that’s confirmed by the lender. Should any surprises impacting your approval arise during that process, you’re protected as a buyer by your financing condition. You then have the option of not “removing” the condition and moving on to find a different property. You only want to go “past the point of no return” when you’re ready, not because you’ve left yourself no other choice.