Closing & Moving In: Understanding Conditions on Home Offers
You’ve found the right home at the right price…now what?
The next step in the home-buying process is preparing an Offer to Purchase (a.k.a. Purchase Offer). This legal document outlines the conditions under which you are offering to buy the seller’s home.
There are two types of Purchase Offers: a firm offer, which means you’re willing to buy the home as is, and a conditional offer, which makes your purchase contingent upon certain conditions (criteria) being met. The most common purchase conditions made by first-time homebuyers relate to home inspections and lender financing approval. Let’s take a look at each.
OFFER TO PURCHASE CONDITIONAL ON HOME INSPECTION
Hiring a qualified home inspector to examine a home can help you avoid expensive problems down the road. The inspector will examine many things, including the state of the home’s roof and building foundation, plumbing, electrical, heating, air conditioning and HVAC system.
If the home inspector identifies any red flags, your conditional offer gives you the option to do any of the following:
Walk away from the purchase
Request that the seller makes the necessary repairs
Try to negotiate a lower purchase price so you can undertake the repairs after taking possession of the home
While buyers in competitive real estate markets may be tempted to waive this condition, it’s better to lose out on a home than buy a money pit you weren’t prepared for.
OFFER TO PURCHASE CONDITIONAL ON FINANCING
Did you know that mortgage pre-approval doesn’t actually guarantee you’ll receive the mortgage you’ve been pre-approved for? It’s true.
Once you make an offer to buy a home, your lender must approve the property that you are buying which includes validating the purchase price and ensuring the property meets the lender’s real estate criteria. In order to do this, the lender may utilize different tools such as internal models or sending an appraiser to complete the property assessment. Also, the lender may request supporting documentation, such as income and down payment confirmation, to confirm the information provided on the mortgage application. In the event that any information changes, it may impact the pre-approved mortgage amount.
If the appraisal is at or above your purchase price, that’s great news — you’re good to go! But if the appraisal is below the purchase price, the lender may offer you a smaller mortgage. Without the conditional offer, you’d be responsible for coming up with the difference between the sale price and the lower-than-expected mortgage loan. Also, because lenders use the appraised value to determine the loan-to-value (LTV) ratio on a mortgage, a lower appraised value could result in a higher LTV – and less favourable mortgage terms, including a higher interest rate. With an offer that’s conditional upon financing, you have the option to back out of the purchase without losing your deposit, as long as you’ve acted in good faith trying to satisfy that condition.
The good news is that a lower appraisal value isn’t an automatic deal killer. If you still want the home, you can always try to renegotiate the purchase price to more closely align with its market value. Thanks to the “out” that the conditional offer provides, you’ve got leverage when it comes to getting the seller back to the bargaining table, so you can get the home you want but at a fairer price.
Genworth Canada: A Better Way to Home Ownership Fall/Winter 2019 Issue (pages 16 -17)