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As the real estate market heats up across Canada, this question comes up more and more...

"Should I offer to buy a house without the financing clause?"

The short answer is, "Sure - if you have the cash to pay for the house yourself if the mortgage doesn't come through as planned."

But...most of us DON'T have enough cash to buy a house without a mortgage. So, the long answer is a little more complex.

When shopping for a home, two of your primary objectives will be to get the house you want for the price that makes you happy. Your mortgage professional will have a few more objectives in mind...but, we'll get to that in a moment.

First, let's understand what a financing clause/condition actually is.

When you make an offer to buy a home, you will put in writing;

1) Price
2) Inclusions (ie. curtains, appliances, etc.)
3) Date of closing (when you take possession)
4) Conditions of your offer (your offer will be subject to your satisfactory inspection, receiving information or documents about the house, such as heating costs, property tax, etc., securing mortgage financing, conducting an appraisal, etc.)
5) Date your conditions will be fulfilled (this is the date the above conditions are due to be confirmed, meaning you are now firmly confirmed to buy the house and the sold sign goes on!)

In many markets across Canada, it's not unusual to have multiple offers on one property and although price is an important factor, so too are the conditions. If you put yourself in the shoes of the seller, you can see why waiving financing clause would be attractive. It may make your offer standout amongst competing offers. It essentially communicates to the seller that you have the financial means to buy the home.

However, as mentioned above, your mortgage professional and lender will be looking at a few more objectives to approve your offer to purchase... 

1) Purchase price - The value in comparison to other similarly sold homes.
2) Amount of your down payment compared to the purchase price - The higher the down payment, sometimes the more need for an appraisal.
3) The location of the home - Rural properties may require an appraisal.
4) The condition of the home - Is it rundown or missing important parts of the home? 
5) Construction - Newly built or extensively renovated homes.
6) Other conditions - Bank repossession, etc.

Any of those objectives could mean an appraisal is required to determine if the price you're paying is the actual market value of the home.

This is often a surprising thing for home buyers to find out - just because you're willing to pay that price, doesn't mean the mortgage lender is willing to approve it at that price.

Most purchases don't require an appraisal. But when it is required, it means an independent 3rd party appraiser approved by the mortgage lender must conduct an analysis on the house/property and determine its value in comparison to other homes that have already sold.

The issue that can come up in hot markets is the past documented house sales hasn't caught up with the current market demand. Or, some buyers are willing to pay more for a home for personal reasons.

For example, would you pay more for a home that was within walking distance to your child's school? Down the street from your parents? Or is painted in your preferred colour scheme? All of those things mean more to a buyer than they do to an appraiser.

So, what happens with the result of the appraisal? One of two things;

1) The appraised value comes back equal to, or higher than the purchase price and the rest of the information is satisfactory to the lender: Your purchase proceeds as planned. This is what happens most of the time.

2) The appraised value comes back less than the purchase price or the rest of the information is not satisfactory to the lender: Your purchase is declined or you have to increase your down payment.

Some buyers can be flexible with their down payment and in that case may not worry about having to increase their down payment amount. But, most buyers aren't as flexible and here lies the concern that I have if you waive your financing clause...

If there's no financing clause in the agreement, your mortgage professional does not have the means to get you out of the agreement due to financing. If the lender does not want to lend on your selected house, or you have to increase your down payment without the means to do so, you may be in a pickle!

And a serious pickle, at that. Your real estate lawyer can provide you more information about what will/can happen if you're in breach of contract, but you could lose your deposit and possibly be sued. That's a lot of headache just to exclude the financing clause.

At the end of the day, the decision is yours, and I as a Mortgage Broker will support you in your choices and work as hard as possible on your application one way or another. But, I always error on the side of caution and am protective over my clients, so when you ask me this question, I will always say, "Sure - if you have the cash to pay for the house yourself if the mortgage doesn't come through as planned. Otherwise, include the financing clause!"

Any questions, I'm always here for you!

Sarah Nixon-Miller
Mortgage Broker
Toll-free 1-844-315-6609