With stiff competition in housing markets across the country, you may encounter eager realtors trying to get a quick sale.
One way this can occur is when real estate agents encourage buyers to make unconditional home purchase offers. This may include getting people to buy without a protective clause that lets them out if they can’t secure financing or a home inspection prior to purchase.
Mortgage brokers can also attest to the fact that some realtors encourage their clients to buy before they sell, even without being able to afford the deposit. Meanwhile, buying a home can be stressful enough without advice that may work against your best interests.
While riskier for the buyer, an unconditional offer raises the probability of a sale and a quicker commission for the agent. However, unconditional offers can also increase your chances of locking in the home of your dreams. You just have to be prepared for the consequences.
Here are a few tips on how you can protect yourself in a worst-case scenario.
1. Leverage the expertise of a mortgage broker
Most homebuyers end up working with both a real estate agent, who handles everything related to the sale of a home, and a mortgage broker, who specializes in the financing.
Mortgage brokers — at least those worth their salt — are paid to ensure financing is solid. They don’t want you blaming them when your financing falls through after you put an offer on a home.
One of the easiest ways to find the most affordable mortgage rate is by working with a mortgage broker and comparing the best rates on the market at the time of your purchase.
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Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.
2. Stick to your guns
As a buyer, you should have a good idea of your maximum budget — not what a lender qualifies you for, but what you can actually afford. A good way to gauge this is by using both a mortgage affordability calculator and mortgage payment calculator to get an idea of what closing price works for you and what your monthly payments might look like.
You should also get honest advice on offer conditions. Purchase agreement conditions, such as a home inspection or a financing clause, are there to protect you despite the fact they may cost you the property when in a multiple-bidding situation.
The temptation can be strong to bid higher than your budget or remove your conditions if it improves the chances of your offer being accepted. This is especially true in aggressive markets where there can be a dozen or more competing offers on your dream house. For example, although the Government of Ontario is giving sellers the option to disclose competing offers on their home to increase buyer transparency, many may still choose to maintain a blind bidding process to increase their chances of a higher-than-average bid.
But caving to pressure, whether it comes from a realtor or your own personal desire to “win” the bidding war, could be financially disastrous if your lender declines you for reasons you never anticipated. Better to lose a home than lose your deposit and be sued for breaching your purchase agreement and not closing.
3. Have a backup plan
If you do go with an unconditional offer, you’ll need a plan B or C in the event things don’t go as planned. This could include not being able to sell your home before closing on your new purchase or not being able to secure financing from your lender.
The result could be that you have to walk away from your offer, which entails its own set of problems and costs.
If you go in firm with no conditions, you’ll need a backup plan if:
- The appraisal comes in too low
- The lender wants a guarantee that the property has no material defects
- The lender or default insurance provider does not approve the property type and/or condition
- Your existing home doesn’t sell and you can’t get your down payment funds to close on the new home
- The lender deems submitted income insufficient to service the requested mortgage
For example, if you visit a broker to get financed after putting in a no-condition offer with less than 20% down, the lender could decline your mortgage application. There may be no other resources to put down a bigger down payment, which would come with a much higher interest rate.
In this case, the deposit could be lost, and you could be sued for not following through on your no-condition offer.
The moral is: always get pre-approved before making an offer without conditions, or be sure you can put down a 20-35% down payment if a bank won’t approve you.
And remember, pre-approvals aren’t foolproof. The lender — and default insurance provider if you’re putting down less than 20% — still have to approve all your documents. So, make sure you get a “fully underwritten” pre-approval where the lender signs off on all key income, multiple listing service (MLS), and down payment documents before you make your offer.
Note, lenders also have to approve the property, its valuation, and — if it’s a condo — its condo documents. They often don’t do that until you apply for a full approval.
Non-conditional offers should only be made by a minority of risk-tolerant, well-qualified borrowers who are willing to pay more to get “worst-case” financing. If you don’t have other assets, stable and verifiable income, excellent credit, etc., don’t cave to pushy realtors, and be sure to add protective conditions.