My mortgage broker had me prequalified for a mortgage, but still says I should include a financing condition when submitting an offer to purchase a home. Why?
Your mortgage broker is making a good suggestion. You have been prequalified, but that’s not the same as being approved for a mortgage. Mortgage prequalification is only tentative approval based on basic financial information.
Typically, a mortgage broker can prequalify you for a mortgage based on minimal information about your financial situation, such as your income and down payment amount. Prequalification helps when you start looking at properties because it tells you the mortgage amount for which a lender would likely approve you. It is not a guarantee a lender will enter into a mortgage contract with you, but it can help you narrow down your property search to a certain price range.
When you find a home you want to buy, your real estate professional will help you write an Offer to Purchase. You should listen to your mortgage broker’s advice and include a financing condition on your Offer to Purchase. A financing condition means the deal isn’t firm until you secure a mortgage and waive the condition. If you aren’t successful in getting a mortgage, you won’t waive your financing condition, you won’t proceed with the purchase, and there won’t be legal consequences for not proceeding with the purchase.
If the seller accepts your conditional Offer to Purchase, you have to apply for a mortgage. To do so, you will have to submit supporting documents (paystubs, T4, letter of employment, etc.), and information about the property you want to purchase (for example, the listing feature sheet). The lender will review your financial situation and information about the property.
The lender wants to review the property to look at a number of things. For example, is the property is worth what you’re paying for it? Is it located in a flood plain? If you’re buying a condominium, is the corporation in financial difficulty? Does the condominium have an appropriate reserve fund? The lender wants to review the property to see if it has an elevated financial risk associated with it. Until you are formally approved, and the lender assesses the property you’re buying, there is no guarantee you will receive a mortgage from the lender. The financing condition gives you a chance to secure a mortgage before finalizing the purchase.
Some buyers who need a mortgage feel comfortable proceeding without a financing condition, possibly to make their offer more attractive to a seller, but it’s rarely a good idea. A financing condition provides a bit of added protection. If you proceed without a financing condition, and are not able to secure a mortgage, you may have to back out of the deal and the seller could take legal action.
“Ask Charles” is a question and answer column by Charles Stevenson, Registrar of the Real Estate Council of Alberta (RECA), www.reca.ca. RECA is the independent, non-government agency responsible for the regulation of Alberta’s real estate industry. We license, govern, and set the standards of practice for all real estate, mortgage brokerage, and real estate appraisal professionals in Alberta. To submit a question, email [email protected].
