Most Common Conditions On A Real Estate Contract
Let’s talk about conditions. The purchase and sale of a home is a legal agreement. There are contracts and lawyers involved. And, rightly so. There is a lot of money changing hands and buying a home is a huge investment. In most scenarios, the conditions protect the home buyer but they also give the seller added protection as well. Below, we’ll walk you through some of the most common conditions that may be included in your offer. However, this is not an exhaustive list. Always consult your real estate agent to determine if other conditions are applicable to your purchase.
1. Financing Condition
Basically, this is a clause that allows a pre-determined number of business days from the date of signing the purchase agreement to firm up the details of your mortgage. This is especially common if you’re entering into a high-ratio mortgage (where you have less than 20% down). Once you sign your purchase agreement, you will have it sent over to your mortgage specialist and their final underwriting process will begin. Depending on the date of your pre-approval, the lender may require you to submit additional paperwork proving that your financial situation hasn’t changed. On all accords, this should be a relatively painless and simple process as the bulk of the financial documents would have been reviewed during your pre-approval.
Why is the financing condition important? It protects you as a buyer. Traditionally, when signing a purchase agreement, you will need to put down a deposit in good faith. The deposit is then applied to your down payment at closing. If you go in without a financing condition and for some reason, your financing falls through, you may have to forfeit your deposit and could be subject to legal action from the seller.
Always refer to your lender to determine if you need a financing condition or not. In a highly competitive market (much like we’re experiencing in the Durham Region right now), it might be tempting to go in with as few conditions as possible. However, that effort to appeal to a seller might backfire on you if cannot secure your financing. Also, in a market where homes are going into multiple offers, it’s wise to consult with your lender on how far you can go over asking before it might impact your ability to secure your mortgage. A good rule of thumb is about 5% over asking. Every lender and home purchase is different so always heed the advice of your financial institution.
2. Conditional On A Home Inspection
Going in conditional on a home inspection allows you to have an independent home inspector go through the property after the purchase agreement is signed. This is at the cost of the buyer (typically around $300-500). During the home inspection, the inspector will look over the home and signal anything that might be of concern or that doesn’t meet building code. Once the inspection report is back, the buyer can return to the seller and ask that certain things be addressed or renegotiate the price to account for said issues. In some cases, if an agreement cannot be reached, it is grounds to terminate the contract. Depending on what the home inspector finds, and your plans for the home, you may not opt to go back to the seller at all. Either way, it serves as an added layer of protection for the buyer.
As mentioned above, when the market is highly competitive, many buyers will waive as many conditions as they can in order to appeal to the seller. A home inspection is often the first to go. Buyer beware, this could carry a risk but it is something that you will need to weigh on a case-by-case basis.
3. A Condition On The Sale Of Your Home
This condition is only applicable to existing homeowners and not first-time buyers. When selling one home to buy another, there is a sequence of events that need to be executed for all deals to go through smoothly. The sale of your home is one of them. If you’re purchasing your new home before you have sold your existing residence, you may need to stipulate that your offer is contingent on selling current your home. Typically, you will give the seller a specific timeframe for this contingency. If all goes well, your home sale and the new home purchase will go smoothly. However, like the conditions above, it gives you a no-fault out if you cannot sell your current home.
Pro tip: If your new home will close before your current home, talk to your lender about bridge financing. If you need advice on how to navigate the purchase of your home, give us a call. We’re always here to help.