Skip to main content Skip to chat

What is a condition of financing?

March 27, 2019

Written by Preet Banerjee

Key takeaways

  • A seller will generally find an offer without conditions to be more attractive.

  • If you omit the condition of financing and are unable to arrange the financing you need, you face financial implications.

  • You could also lose your deposit if you're unable to secure financing.

  • You can avoid these problems by carefully considering the risks of omitting or waiving a financing condition. 

What is a condition of financing?

When making an offer to buy a home, it's fairly routine to make that offer conditional on arranging financing. That means your offer can be withdrawn if you're unable to arrange the mortgage required to complete the sale.

But in a hot real estate market, buyers often find themselves either omitting or waiving the financing condition in order to help seal the deal. All other things being equal, a seller will generally find an offer without conditions to be more attractive. What are the implications and risks of not having a condition of financing in place?

Risks of omitting or waiving condition of financing

If you omit or waive the condition of financing and are unable to arrange the financing you need, you face financial implications. Without financing, you will probably not be able to close the purchase transaction. If this happens, you'll likely forfeit your deposit and you also risk being sued by the seller for damages.

If you can arrange financing, but for a lower amount than you were expecting, you'll have to pay the difference out of pocket. That can happen if your lender's appraisal of the home is lower than your purchase offer price, in which case, they'd approve you for a lower mortgage than you were expecting.

It's also possible for the seller to sue you if your inability to close the deal negatively impacts the value they ultimately get for the home when they do sell.

Losing your deposit

When you make your offer, the larger your deposit is, the more attractive your offer is to the seller. But there is no standard amount required for deposits. 

In some areas in Canada, deposits can be under $1,000. But in the more heated markets of Toronto and Vancouver, 5% (or higher) is more typical. Whatever that amount is, that's generally what you stand to lose if you're unable to secure financing for your accepted offer - unless you have a condition of financing in place.

Getting approved for a lower amount than expected

Let's say a home is listed at $400,000 and you have a 5% down payment in mind ($20,000). After a bidding war, you end up offering $450,000 without a condition of financing in place. The lender appraises the home at $425,000. They offer you a mortgage of 95% of that value, or $403,750. That means you'd have to come up with an additional $26,250 on top of your original $20,000 down payment to close the deal.

Carefully consider the risk of waiving

Losing a deposit or having to find thousands of dollars to top up your down payment can be financially crippling.

You can avoid these problems by carefully considering the risks of omitting or waiving a financing condition. A mortgage pre-qualification is not enough to rely on, because it's essentially just a calculation that tells you, based on the numbers you provide, how much you could qualify to borrow.

A mortgage pre-approval is a bit more in-depth, with lenders wanting to check out your numbers in detail and performing a credit check, but it's not a guarantee that they'll extend a mortgage to you just yet. If there's anything out of the ordinary about the home you make an offer on, if you've bid more than what the bank thinks is appropriate or if your circumstances change since the date of the pre-approval, the lender may decline to provide the mortgage.

Prudence suggests sticking with a condition of financing until you actually have financing secured for the deal you've made an offer on. Not having that condition before the ink has dried from your lender is a risk. However, in a hot market, there are many people who will take on this risk in order to avoid losing out on getting their ideal home. 

Before you decide to forego or waive a condition of financing, discuss with your lawyer and real estate agent to make sure you understand the risks.

This article or video (the “Content”), as applicable, is provided by independent third parties that are not affiliated with Tangerine Bank or any of its affiliates. Tangerine Bank and its affiliates neither endorse or approve nor are liable for any third party Content, or investment or financial loss arising from any use of such Content.

The Content is provided for general information and educational purposes only, is not intended to be relied upon as, or provide, personal financial, tax or investment advice and does not take into account the specific objectives, personal, financial, legal or tax situation, or particular circumstances and needs of any specific person. No information contained in the Content constitutes, or should be construed as, a recommendation, offer or solicitation by Tangerine to buy, hold or sell any security, financial product or instrument discussed therein or to follow any particular investment or financial strategy. In making your financial and investment decisions, you will consult with and rely upon your own advisors and will seek your own professional advice regarding the appropriateness of implementing strategies before taking action. Any information, data, opinions, views, advice, recommendations or other content provided by any third party are solely those of such third party and not of Tangerine Bank or its affiliates, and Tangerine Bank and its affiliates accept no liability in respect thereof and do not guarantee the accuracy or reliability of any information in the third party Content. Any information contained in the Content, including information related to interest rates, market conditions, tax rules, and other investment factors, is subject to change without notice, and neither Tangerine Bank nor its affiliates are responsible for updating this information.

Tangerine Investment Funds are managed by 1832 Asset Management L.P. and are only available by opening an Investment Fund Account with Tangerine Investment Funds Limited. These firms are wholly owned subsidiaries of The Bank of Nova Scotia. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.